Ontario Construction Report staff writer
Canada’s surety market is healthy in 2022, despite a litany of challenges including inflation and construction industry supply disruption.
Steve Ness, president of the Surety Association of Canada (SAC), says rates are staying quite consistent. The surety industry is maintaining its profitability despite the pandemic and follow-on inflation and supply chain disruptions, he said.
Certainly there are challenging issues, especially relating to the impact of inflation on contractor’ bonding capacity. However, the surety model – where underwriters evaluate project risk and contractors’ capacity to do the work – provides a significant degree of protection, preventing contractors from taking bad jobs where there aren’t appropriate controls to prevent negative consequences caused by inflation.
Ness says he expects things to slow down, but he doesn’t expect the “disasters” that happened during the 1990s, “when we had 135% loss ratios two years in a row.”
“I don’t see that happening again,” he said. The industry, first of all is so much stronger in terms of the players. Back in the early 90s we had some marginal surety companies that probably shouldn’t have been in the business.”
These days, the surety businesses are much healthier. “The due diligence is far more sophisticated. The experience, the algorithms and the credit models and analysis are so much better.” As well, the industry has been profitable almost continuously since 1996, with a couple of exceptions in 2013 and 2018, when a few major contractors failed.
Ontario’s prompt payment legislation introduced in 2018 has set the stage for similar laws in other provinces, helping cash/payment flow and providing heightened surety protection for various projects.
Even in an inflationary environment, with surety covering 50 per cent of the original project cost, there will be in most cases enough funds for the project owner and surety to successfully complete their contracts if things go wrong, Ness says.
He says electronic bonds caught on during the pandemic when physical offices needed to be closed – and now provide enduring benefits of speed and lower administrative costs.
Ness suggests the best advice he can give to a contractor possibly facing challenges in the current environment is to “maintain a close relationship” with the surety provider.
“Don’t give them any surprises,” he said. “Give them the information they are asking for. Ultimately, you know, if the news is bad, it is better to let them know now rather than later.
“Even though this may go against your grain: ‘I don’t want to do this – they’re going to cut me off.’
“Usually they won’t. They’ll just factor things in and then they’ll try to work with you to see how we can make things better.”