Do Lenders On Private Construction Projects Benefit From Performance and Payment Bonds?

The answer is yes! Do lenders frequently take advantage of this risk mitigation mechanism? Not often enough!

NASBP is committed to finding ways to improve the awareness among financial institutions of the value performance and payment bonds contribute to funding private construction projects. This is clearly an underserved segment of the construction marketplace for the surety industry, so bond professionals should seize this opportunity to influence this untapped source of new business. Some lenders and their developer and building owner customers understand and appreciate the prequalification and ultimate protection surety bonds deliver to shield them from the multitude of risks contractors face on a daily basis. If only more of them could embrace this! Efforts are underway to improve their level of appreciation.

One of the objectives at each of NASBP’s Regional Meetings this fall was to raise the awareness of surety bonds among lenders. This was accomplished by working cooperatively with key Surety and Fidelity Association of America (SFAA) leaders and several lenders who rely on performance and payment bonds to develop material aimed at educating lenders about bonds. In keeping with NASBP’s theme this year (Make Every Minute Count), information in the form of a slide presentation and corresponding videos is easy for all bond professionals to access. Find these resources on NASBP’s homepage under “Network” or here: www.nasbp.org/informed/lender-video.

During the NASBP Regional Meetings it was surprising to learn that many lenders aren’t aware of several important aspects of the bonding industry.  For example:

• There is a major distinction between non-cancellable surety bonds and the rapidly changing marketplace for subcontractor default insurance (SDI).
• Verifying the authenticity of performance and payment bonds is a simple and necessary task.
• Bond riders naming lenders are readily available in exchange for honoring the owner’s obligations in a contract and are included in the cost of performance and payment bonds.
• The myths that big contractors never fail and that the surety industry doesn’t pay claims are false. Based on SFAA statistics, the surety industry incurred more than $800,000,000 in losses in 2019.
• Bid bonds offer a stronger commitment than bondability letters.
• The process of finding participants for construction loans and transitioning construction loans to take-out lenders can be improved if performance and payment bonds are in place.
• Performance and payment bonds provide a different, and superior, assurance of performance compared to irrevocable letters of credit.

John Bustard is Executive Vice President of King & Neel, LLC in Honolulu, HI. He can be reached at john@kingneel.com and 808.539.5419.