Hi, this is Alyssa Burley with Rancher Mays' Media Communications and Client Services Department. Thank you for listening to today's top-range Mays' news brought to you by our Safety and Risk Management Network, Studio One. Welcome back everyone. My guest today is Andy Roberts, a County Executive in the Rancher Mays' Surety Department.
He specializes in performance and payment bonds for the construction industry. And I've asked him to help us understand some of the early warning signs that COVID-19 is impacting surety bonds. Andy, welcome to the show. Thank you very much for having me, I'm excited to be here.
Let's hop right in. The COVID-19 pandemic has already had many short-term effects on businesses, and there will certainly be long-term effects that were just now starting to see the early warning signs, specifically in the surety market. As an industry expert, what are you seeing as early indicators of the cutting surety market? Well, the long-term effects might not be known for years, some short-term changes are already occurring.
Pretty early on, we have witnessed bond companies start to tighten their underwriting guidelines. And now, on the contractor side, we're seeing an increase in general contractors or GCs requiring performance and payment bonds from their subcontractors. So more GCs are requiring subcontractors to get bonding on their projects. What if you're a contractor and you've been bonding your projects even before COVID?
Has anything changed? So for contractors that do a lot of public works or work with GCs that require bonds already, this isn't going to be too much of an issue for them as they already have established bond programs and understand the process. They may be getting asked a few more questions now because bond companies are taking a little harder look at their projects, but overall, this doesn't really change anything for them. However, for contractors that have never been required to bond before, they're being thrust into a part of the construction insurance world that is completely foreign to them.
For those contractors that fall within the group that hasn't had an established bond program in the past, what exactly are performance and payment bonds and why are so many contractors being asked to provide them? So to put it simply, the performance bond is an assurance to a project owner, or in this case, a GC by a charity company that the contractor is capable and qualified to perform the contract and protects the GC from financial loss if the contractor fails to perform in accordance with the terms and conditions agreed upon. The payment bond assures that the contractor will pay certain subcontractors, workers, and material suppliers that are associated with the project. So why wouldn't GCs have been requiring bonds before the pandemic?
So while these assurances are meaningful, GCs very often don't require bonds because of the extra costs associated with obtaining them. Bonds typically cost 1 to 3% of the contract price, with the GC in many cases paying the corresponding premium. COVID-19 has created turmoil in the financial marketplace in many ways, including a tightening of available money, a length of accounts receivables, high unemployment, and an overall slowing of the economy. With so much uncertainty surrounding the effects that COVID-19 may have on individual contractors' financials, GCs are becoming more risk-averse and willing to absorb the cost of the bond to avoid subcontractor defaults in the mobile project.
In those situations, the GC can rely on the charity company that wrote the bond who will step in to make sure the work is completed. For contractors that have never secured a bond before, the process can seem daunting, complex, and kind of evasive, which makes having a good charity agent and bond company vital to help make sure that the process is seamless. So yeah, I mean, getting a bond is definitely a pretty invasive process. And here at Rancho Mesa, we work with a number of high-quality charity markets that provide a variety of different types of bond programs, and we have the expertise to get you set up with one that works best for your company's security bond needs.
Andy, if listeners have questions about their charity program, what's the best way to get in touch with you? So I can be reached at 619-937-0166 or at aroberts at rancho-mesa.com. Andy, thank you so much for spending a couple of minutes to help us get prepared for the coming sure to mark it. You're welcome and thank you so much for having me.
This has been great. This is Alyssa Burley with Rancho Mesa. Thanks for tuning in to our latest episode produced by Studio One. For more information visit us at rancho-mesa.com and subscribe to our weekly newsletter.