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Surety Corner: How long can contractors continue to work through unprecedented challenges?

Surety Corner: How long can contractors continue to work through unprecedented challenges?

2021 was the year of the Ox, which is said to bring stability, calmness, great opportunity and economic prosperity.

It would be quite tough to describe last year as calm or stable for any industry and the surety world is no different. The industry has been struggling with staffing challenges, a slow but steady increase in claims activity and a general uncertainty of what is to come as we work through these unprecedented and challenging times. However, despite these challenges, 2021 was in fact a year of great opportunity and prosperity for the surety industry. Premiums grew significantly and the overall results were a significant improvement from the year prior.

On the other hand, for the construction industry as a whole, 2021 was another very challenging year with contractors dealing with increased costs, COVID-related health and safety challenges, serious labour issues and major supply chain delays. Despite these issues, the industry performed quite well and we saw very few contractor failures across Canada.

Contractors have a right to be very proud of what they have been able to accomplish over the past couple of trying years.

As Steve Ness, president of the Surety Association of Canada, recently noted, “2021 was a very happy story for the surety industry. A lot of the increased premium was a result of construction inflation but not all of it. Our members across the country are reporting that they are busier than ever and issuing more bonds than ever before. Their contractor clients have seen more activity plus we’ve seen a spike in megaprojects at locations across the country. From a loss perspective, we are thankfully back to pre-pandemic levels”

Direct Written Premium for all surety written in Canada during 2021 was $793.6 million, representing an increase of 21.7 per cent from the 2020 writings of $653 million. Note that construction premiums roughly make up about 70 per cent of these premiums. From a claim’s perspective, total direct claims reported totalled $165.1 million, for a loss ratio of 20.8 per cent, which is a significant improvement from 2020’s loss ratio of 40 per cent.

Steve Ness continued, “The results are very encouraging but there are challenges to come and we will see how the industry fares over the next year.”

To Ness’s point, 2022 does seem to be a bit more of a challenging year to date. Business failures in Canada are already ticking upwards and bond claims are starting to increase in frequency. The main complaint the industry is seeing from owners right now is the inability of contractors to deliver projects on schedule. The majority of these delays are driven by material and supply chain challenges though rather than contractor performance, which is a very difficult issue for the sureties to step in and remedy. Regardless we do expect that results may worsen this year.

As Mark Skanes, chair of the board of directors of the Surety Association of Canada and vice-president of Western Surety, recently noted, “A lot of companies have large backlogs, some with pre-COVID pricing or early COVID pricing.  Job pricing two years ago, one year or even a couple of months ago is no longer reflective of actual costs. We all know there are supply chain issues, delays with material arrivals, the costs of materials have increased and contractors are having an issue getting suppliers to guarantee pricing. In addition, the availability of good labour at a reasonable cost is becoming an increasing problem. This all affects the jobsite. Some obliges (project owners) are willing to discuss these increases in pricing, others not so much.

“How this will affect the balance sheet of our clients? Only time will tell.”

Skanes continued to note, “The enormous number of new bond wordings that have been brought into the industry over the past two years is also concerning. Some of these forms are very good, devised by experts who have a commitment to making our industry better. Others are very one-sided and give owners and GCs an unfair advantage over subtrades. These bonds are guaranteeing much more complex contracts. Productivity issues, labour availability and material costs coupled with more complex bond wordings are greatly increasing the number of disputes the sureties are being made aware of and drawn into.”

Fast forward almost six months into 2022, and the concerns of Skanes and Ness seem quite on point. Not only are we dealing with all of the challenges noted above, we are also now facing higher interest rates, ridiculous gas prices that are rapidly eating away at profit margins and major inflationary challenges as well.

The question is how long can contractors continue to work through all of these unprecedented challenges, especially now with the government subsidy tap turned off. The sureties will need to be extra diligent this year and next to ensure their contractors are well positioned to work through these unprecedented times.

Jamie Collum is the vice-president of construction for FCA Insurance. He has delivered numerous seminars and presentations on construction bonding and general industry updates in Ontario to various construction associations over the years. Andrew Cartwright is the vice-president of surety for FCA Insurance. Andrew recently joined FCA after a decade long tenure as RVP for a large national surety company.

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