How Bonding Surety firms drive construction staffing.
Updated: Jul 25
It may seem unlikely, but one major factor in construction manager staffing is the requirements that surety firms place on construction companies.
Bonding is an important limiting factor in the growth of construction firms - the construction firm is restricted in the amount of construction it can be bonded for by the surety firm's analysis of their ability to pay. That analysis is comprehensive, and gets ever more invasive as the firms and bonding amounts get larger.
Surety firms as part of their analysis of the firms they provide bonds for, review those companies for many factors, including individual project profitability, typical balance sheet analysis such as liquidity ratios, working capital availability, backlog, fee erosion, and many other items. Since the surety is guaranteeing the performance of the construction firm, this review would seem to be reasonable, but it is many orders of magnitude greater than the review that an individual might undergo for a mortgage.
Most construction firms that manage finances closely worry about fee erosion - or the sin of making less profit on a project than initially projected. They are concerned about this of course because they are in business to maximize profit. They are also concerned that degraded profit will be seen by the surety firm as a reduced ability to make profits, and the surety may choose to reduce the total bonding capacity of the firm. Less bonding capacity means less work.
Another result of "fee erosion" directly attributable to the concerns of the surety is that with less work, or less bonding capacity, the construction firm must reduce it's costs to match the work level it is currently projecting. Construction management firms primary cost is their staff, and if bonding capacity, and thus work load and projected income decrease, then the cost lines must also decrease in order to avoid having bonding capacity reduced. The most effective way to reduce that cost is often reducing staff.
These 2 factors can multiply each other if not closely watched, and can result in significant problems for a firm that lets their bonding capacity spiral down.