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August 17, 2022 Feature

COVID-19 Effects on Construction Bonds and Potential Relief Available for Parties of Delayed Construction Projects

By Eric M. Hurtt
As a result of the COVID-19 pandemic, sureties must be innovative to keep business steady during a volatile time.

As a result of the COVID-19 pandemic, sureties must be innovative to keep business steady during a volatile time.

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Throughout the pandemic, the global economy has changed in many ways. The world abruptly shut down and gradually reopened. Also, many citizens solely relied on unemployment and stimulus checks causing the economy to change drastically. Additional stressors like supply chain issues inflated the cost of certain products and services. One of the affected industries you may not hear about on the morning news is the surety industry. The surety industry was forced to make changes to remain profitable during the COVID-19 pandemic. With the housing market setting records and the home building industry uncharacteristically slow, sureties must be innovative to keep business steady during a volatile time. During the pandemic, large-scale COVID-19 outbreaks, labor shortages, and inflation in material prices caused significant delays.

What Is a Surety Bond?

In 2019, the North American surety market was valued at $8.5 million. The three most common surety bonds in the construction industry are bid, performance, and payment bonds. When a bond is requested, the surety will issue a bond for the protection and benefit of the obligee. An obligee is a party that another is bound to by contract. The principal is a party required to obtain the surety bond by the obligee. When the completion of the bid, the performance of the contract, or payment to another contractor does not occur, the obligee often files a claim. After some investigation of the bond claim, the surety will likely satisfy the obligation or pay a bond penalty (penal sum). This basic structure protects contractors and the entities funding the construction projects. When bonds are not required, some contractors choose not to use surety bonds to cut costs. Increased costs are one of the disadvantages of surety bonds. The bond amount is typically for the contract amount. However, the surety must charge a premium to stay in business. Those premiums range from 1 percent to 3 percent of the bond amount. However, not bonding a project could cause contractors to take significant losses and even declare bankruptcy.

A surety company’s fundamental business structure is to issue bonds to qualified contractors that will not default. A surety’s objective is to issue as many bonds as possible while paying out the bond penalty at the lowest frequency possible. To do this, they must identify contractors with a history of reliability and the means to carry out the specific job. In a time of unpredictability, how can sureties and contractors protect themselves?

The Effects of Delays on Bonded Projects and the Potential for Relief

Since March 2020, fluctuations in supply and demand have affected numerous industries. A prime example is the housing market. Homes are in high demand while new home construction is in short supply. In the spring of 2020, the price of crude oil fell to a record low. One of those factors was the reduction in travel. The nine-to-five commute in most cities was significantly reduced because employees worked from home. Air travel was in low demand due to travel restrictions. Also, supply chain issues stifled the shipping and manufacturing industries. These changes affected sureties in totality. But the effect on the supply bond deserves a deeper look.

Supply bonds are contract bonds where the surety guarantees that a supplier will deliver materials according to the agreement. These supply bonds can guarantee price, quantity, and shipping timeframe. Supply bonds are similar to performance bonds. However, they are tailored to ensure the timeliness of shipping and the material characteristics of the goods promised. We can anticipate that the pandemic’s effects could make supply bonds more popular with that background. This increased popularity is generally positive, but the lack of consistency in global markets and trade will likely affect what shipping transactions will be profitable for the surety industry. Even when the pandemic is in the past, other stimuli can affect trade, including war, strikes, insolvency, law changes, and fluctuations in demand. One internal change a surety could make is to require companies requesting bonds to provide proof of higher levels of liquidity.

Stay-at-home orders and travel restrictions made some of the surety industries’ most basic functions more burdensome than before the pandemic. Surety companies must follow the process of in-person requirements to execute bonds. Surety organizations, however, lobbied lawmakers to allow for electronic execution and to relax the requirement for notarized documents. The backlog of court cases caused by the courthouses shutting down has delayed sureties and contractors getting their day in court. As a result, there is a lack of legal authority to guide contractors and sureties on how to navigate problems caused by projects delayed by COVID-19. Despite all those challenges, there are still some positive examples for companies moving forward. Surety bonds generally allow for some relief when construction projects experience delays. Excusable delay and compensable delay are two types of relief that sureties can offer contractors. Contractors can be given more time and sometimes additional compensation if a delay is considered excusable. To receive relief, a contractor needs to prove that the delay was unforeseeable, beyond the contractor’s control, that no fault or negligence came from the contractor, and that the contractor did not contribute to the government’s delays. To prove the contractor did not contribute to any delay, contractors must provide documentation. Unfortunately, during the start of the pandemic, some companies were more worried about staying solvent than increasing their levels of documentation. When applied to the facts of a construction project with multiple contractors and moving parts, it is a high bar to meet. Even when a contractor is not entitled to relief, they can minimize their future legal and financial trouble if they can provide their surety and fellow contractors the proper notice to mitigate losses.

Sureties can take several measures to minimize the likelihood of delays caused by governments and contractors. Sureties will need to take a detailed look at what industries are directly and indirectly affected by the pandemic and its aftermath. Once identified, they will have to analyze how dependent a potential principal is on the affected industry. Throughout the bond’s life, sureties can establish more regular inspections of the bond principal’s updated progress and financials. These changes will better position sureties while also making projections more accurate. Stricter processes can also save contractors from taking on roles in projects that they are not equipped to handle.


If a global pandemic has taught companies anything, it is that unforeseen events can change the status quo overnight. However, when companies learn new ways to manage risks, those market participants will be better equipped for any future disruption.

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By Eric M. Hurtt

Eric M. Hurtt is an associate attorney at Levy Craig Law Firm and a member of his firm’s Litigation and Surety practice group. He may be reached at [email protected].