As Arizona continues to experience rapid population growth, the construction industry is a critical player in accommodating the evolving needs in the state — from new commercial projects and infrastructure developments to housing community demand.
And while this economic activity is ultimately a good thing, it also brings with it increased risk and a high bar for quality, budget and timelines. Add to that other market dynamics like labor shortages, rising material costs and supply chain disruptions, and construction industry leaders may find themselves in a difficult and pressurized predicament.
With so much at stake, risk management tools like surety bonds have become more essential than ever to safeguard all parties involved.
Surety Bonds: A Risk Management Imperative
Surety bonds are legally binding agreements involving three parties: the principal (contractor), the obligee (project owner) and the surety (insurer). In essence, a surety bond is a guarantee from the insurer/surety that the contractor will fulfill its obligations.
Sureties conduct a thorough prequalification of contractors before issuing a surety bond. During this process, the project owner’s financials, past project history and management processes are all investigated and must meet rigorous requirements to qualify. After the surety bond is granted to a contractor, the surety continues to monitor the contractor’s performance and ability to meet high-quality standards.
These bonds come in different shapes and sizes depending on project needs and goals, including:
- Payment bonds: Protects a project owner from liens against the property, guaranteeing a contractor will pay subcontractors and suppliers as agreed.
- Bid bonds: During the bidding process, guarantees a contractor will enter into the contract and follow through on job completion as bid.
- Performance bonds: Ensures a contractor will complete work in alignment with the construction contract and protects project owners in the event of a contractor default.
Each bond type serves a specific role in safeguarding a project’s integrity and all work to ensure projects meet specifications and honor commitments.
This doesn’t just benefit project owners — it also provides necessary stability to contractors. That includes protecting them from the possibility of owners severing a contract mid-project, offering assurance that contract terms will be honored with mitigated risk and aiding new construction businesses in meeting quality and performance standards.
Advantages of Bonded Work
Beyond monetary benefits, surety bonds contribute to construction industry stability and offer several key advantages:
- Guaranteeing project completion: If a contractor defaults on a project, a surety bond financially compensates the project owner or covers a new construction company to finish the remaining work.
- Providing capable and qualified contractors: Project owners can rest easier knowing a bonded contractor has gone through the process of qualifying for a bond, which can be rigorous.
- Cultivating trust and confidence: Since bonded projects protect from delays and costly impacts, investors, stakeholders and clients often feel more secure in project completion compared with unbonded projects.
Why Surety Bonds Are Crucial in 2025
Forecasts of the construction industry heading into 2025 balance optimism with caution. As of July 2024, The American Institute of Architects (AIA) reported construction financing rates run between 4.25% and 4.5%.
Since then, the Federal Reserve has begun to implement rate cuts — a change welcomed by construction leaders who are eager to see lower borrowing costs and more construction activity. Even so, leaders noted that lower rates are only one piece of the puzzle, and the full impact will take time to materialize.
Another major factor: cost of materials. According to a September analysis by Associated Builders and Contractors (ABC), construction input prices rose slightly in August. Despite that, ABC reported overall construction input prices were 0.7% lower than the year prior, and nonresidential construction input prices were down by 0.9% — a possible sign of stabilization.
On the labor market front, ABC reported signs of loosening in November, while September U.S. Bureau of Labor Statistics data showed a decrease in construction unemployment rates across 21 states compared to September 2019. This suggests a mixed landscape where overall hiring may be slowing, but certain states are seeing improved employment within construction. These dynamics underscore the importance of surety bonds in maintaining project stability and mitigating risks tied to workforce fluctuations.
All told, surety bonds are key to navigating common construction risks and today’s complex market nuances, as well as the associated potential legal ramifications and reputational damage when projects go awry.
Tyler Graves is an Arizona-based bond director with Marsh McLennan Agency, providing oversight of the local brokerage’s bond department and handling client surety needs. With more than 15 years of experience in the financial industry, including the last decade specializing in construction surety, Graves crafts creative, effective solutions tailored to his clients’ diverse business challenges.
