Surety as a Solution For Billion-Dollar Construction Projects

Disaster recovery plus infrastructure projects stretch builders; sureties could be next.
By: | May 1, 2018 • 6 min read

Building is booming in the United States. Billion-dollar projects are no longer unusual. The trend toward larger projects is mostly a boon to contractors and to the surety-bond underwriters who back the developments, but the volume and size of the work is becoming a matter for concern for some underwriters.


“It is a very different thing for a general contractor to do $800 million in revenue from two $400 million projects or from 100 $80 million projects,” said Geoff Delisio, senior vice president of surety, Berkshire Hathaway Specialty Insurance.

In another example, Delisio noted that typically the electrical work is 20 to 25 percent of a project. On a billion-dollar project, that is a $250 million subcontract.

“Risk managers [at owners and contractors] are dealing with this daily,” said Delisio. “We have similar thoughts: How much risk do we want to take on a single project? As we look ahead, we don’t see anything but larger projects. Are $5 billion or $10 billion projects too far in the future?”

“Ten years ago, I could count the number of billion-plus-dollar projects on one hand,” said Peter Quinn, head of bonding/surety, Euler Hermes Americas. “That has increased four or five times.”

Questions Around Capacity

The regulatory requirements for surety in the U.S. have resulted in higher barriers to entry for new surety underwriters than in some other lines of insurance. The regulatory regime also means offshore markets are generally not open.

Delisio said capacity could become a concern depending on the size of the project and where a surety underwriter attaches: “We may see the first push on tightening this year or next.”

“Ten years ago, I could count the number of billion-plus-dollar projects on one hand. That has increased four or five times.” – Peter Quinn, head of bonding/surety, Euler Hermes Americas

For now, most remain confident that capacity is adequate but, as Delisio advised, there are contributing factors to keep an eye on.


Susan Hecker, national director of contract surety, Gallagher, said, “At a project size of $2 billion or more, it might become an issue, but many of those projects are joint ventures and have a co-surety structure.

“There are always underwriting questions around large public-private partnership projects as well as when mega-contractors secure multiple large contracts,” she said. “However, those situations could also be a credit case … more individual contractor capacity issues rather than an indication of a restriction of overall surety capacity.”

“We have not seen overall tightening in the surety market,” said Joanne Brooks, vice president and counsel, The Surety & Fidelity Association of America. “But as an industry, we should be prepared to tighten, or we are going to be called upon under the bonds to finish some of these projects and ensure subcontractors and suppliers are protected and paid.”

Brian Fogle, vice president and regional underwriting officer, Liberty Mutual Global Surety

Brian Fogle, vice president and regional underwriting officer, Liberty Mutual Global Surety, said the issue is currently more of a capability crunch than a capacity crunch.

“There has been plenty of surety capacity since the recession and the lag in construction. The building surety businesses have been waiting for this recovery. But it can be a challenge when it all comes at once.”

The volume of work is of increasing concern, said Brooks. “The issue is not really capacity in the surety sector, even for large projects. It is more a matter of a given contractor’s capacity. There are a limited number of contractors at the top end who are capable of performing billion-dollar projects.”

Not only is there a greater demand for builders, but projects are also lasting longer, Fogle added.

“When projects last five or eight years, rather than two or three, capital and commitments are tied up for longer. That also increases risk. Owners understand this.”

Brooks has observed that sureties could consider reining in capacity because of several trends in the construction sector. Subcontractors are already getting a great deal of work and new tariffs may raise the price of construction materials, notably steel and aluminum.

“There is also the number and scale of natural disasters, hurricanes, mudslides and fires,” she added.

Delisio noted, “There is a whole generation of experienced individuals moving to or are already in retirement. Here we are 10 years on from the recession, and there is a bit of a gap now that the business is revving back. The 10- to 20-year people are few and far between.”

Phasing Projects

One possible response to the burgeoning size of projects is to subdivide them: “Sometimes an owner will float a long-duration project and there are only a limited number of underwriters that can bond a billion-dollar project,” Fogle explained.

“But there are more who can bond a series of four $250 million projects. There are more contractors who can handle that size project as well. Contractors like to phase their work and resources as well.”

Phasing a project gives owners more capability to bring in more contractors and more underwriters, he said.

Phases also extend bonding capacity, but Fogle said that is not as much of a concern. “We’ve got a huge Treasury listing, and we can write billion-dollar projects, but we like to diversify our risk. We have some projects we write on a sole basis, but most of our larger accounts we write on a co-surety basis.”

“Sometimes an owner will float a long-duration project and there are only a limited number of underwriters that can bond a billion-dollar project.” – Brian Fogle, vice president and regional underwriting officer, Liberty Mutual Global Surety

He noted that “co-sureties are liable joint and severally, so we have to be careful. We underwrite our co-sureties just as we underwrite our clients.”


Quinn concurred that co-surety is a common solution for large projects. He also noted “there are opportunities for owners to accept something less than 100 percent, down to as low as 50 percent. That means they are accepting a lower bond amount.

“The reality is that there are 130 sureties in the U.S., but only about eight that can participate in bonds of the largest size. That does increase costs [for the projects] some, but that is not holding projects back.”

“We do have underwriting capacity for large projects, especially those performed in joint venture or consortium,” said Brooks. “There might be limits imposed for a given contractor that has reached the top of its aggregate capacity.”

Adapting to Scale

Quinn expressed confidence the industry will get itself sorted in time.

“There are newer players, and as project size has grown, the industry needs to respond, even though there may be fewer people participating at the highest levels.” The scale and scope of the business may be changing, but the fundamentals have not, he said. “It still comes down to underwriting and individual risk.”

At the other end of the market, there are no concerns for underwriting or the capacity of contractors to handle and complete projects.

“We play at the smaller-project level, $100 million or less,” said David Layman, vice president and chief underwriting officer, Argo Surety. “There is plenty of capacity for us and for our clients.”

Given the nature of the construction business, that ample capacity on the part of contractors for smaller projects is not a resource that can easily be aggregated for the larger projects where there is a capability crunch.

“Our clients are general builders themselves,” Layman explained. “They are not going to sub-contract to other [larger] general builders.” &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

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Risk Management

The Profession

The risk manager for Boyd Gaming Corp. says curiosity keeps him engaged, and continual education will be the key to managing emerging risks.
By: | May 1, 2018 • 4 min read

R&I: What was your first job?

I was trained as an accountant, worked in public accounting and became a CPA. Being comfortable with numbers is helpful in my current role, and obviously, the language of business is financial statements, so it helps.

R&I: How did you come to work in risk management?

Working in finance in the corporate environment included the review of budgets and the analysis of business expenses. I quickly found the area of benefits and insurance — and how “accepting risk” impacted those expenses — to be fascinating. I asked a lot of questions. Be careful what you ask for — I soon found myself responsible for those insurance areas and haven’t looked back!

R&I: What is the risk management community doing right?


I have found the risk management community to be a close-knit group, whether that’s industry professionals, risk managers with other companies or support organizations like RIMS and other regional groups. The expertise of the carriers and specialty vendors to develop new products and programs, along with the appropriate education, will continue to be of key importance to companies going forward.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

As I’m sure many in the insurance field would agree, Hurricanes Katrina and Rita in 2005 changed our world and our industry. It was a particularly intense time and certainly a baptism by fire for people like me who were relatively new to the industry. This event clearly accelerated the switch to the acceptance of more risk, which impacted mitigation strategies and programs.

Bob Berglund, vice president, benefits and insurance, Boyd Gaming Corp.

R&I: What emerging commercial risk most concerns you?

The fast-paced threat that cyber security represents today. Our company, like so many companies, is reliant upon computers, software and IT expertise in our everyday existence. This new risk has forged an even stronger relationship between risk management and our IT department as we work together to address this growing threat.

Additionally, the shooting event in Las Vegas in 2017 will have an enduring impact on firms that host large gatherings and arena-style events all over the world, and our company is no exception.

R&I: What insurance carrier do you have the highest opinion of?


With the various types of insurance programs we employ, I have been fortunate to work with most of the large national and international carriers — all of whom employ talented people with a vast array of resources.

R&I:  How much business do you do direct versus going through a broker?

We use brokers for many of our professional coverages, such as property, casualty, D&O and cyber. We are self-insured under our health plans, with close to 25,000 members. We tend to manage those programs internally and utilize direct relationships with carriers and specialty vendors to tailor a plan that works best for team members.

R&I: Who is your mentor and why?

I have been fortunate to have worked alongside some smart and insightful people during my career. A key piece of advice, said in many different ways, has served me well. Simply stated: “Seek to understand before being understood.”

What this has meant to me is try everything you can to learn about something, new or old. After you have gained this knowledge, you can begin to access and maybe suggest changes or adjustments. Being curious has always been a personal enjoyment for me in business, and I have found people are more than willing to lend a hand, offer information and advice — you just need to ask. Building those alliances and foundations of knowledge on a subject matter makes tackling the future more exciting and fruitful.

R&I: What have you accomplished that you are proudest of?

Our benefit health plan is much more than handing out an insurance card at the beginning of the year. We encourage our team members and their families to learn about their personal health, get engaged in a variety of health and wellness programs and try to live life in the healthiest possible way. The result of that is literally hundreds of testimonials from our members every year on how they have lost weight, changed their lifestyle and gotten off medications. It is extremely rewarding and is a testament to [our] close-knit corporate culture.

R&I: What’s the best restaurant you’ve ever eaten at?


Some will remember the volcano eruption in Iceland in spring of 2010. I was just finishing a week of meetings in London with Lloyd’s syndicates related to our property insurance placement when the airspace in England and most of northern Europe was shut down — no airplanes in or out! Flights were ultimately canceled for the following five days. Therefore, with a few other stranded visitors like myself, we experimented and tried out new restaurants every day until we could leave. It was a very interesting time!

R&I: What is the riskiest activity you ever engaged in?

I am originally from Canada, and I played ice hockey from the time I was four years old up until quite recently. Too many surgeries sadly forced my recent retirement.

R&I: What do your friends and family think you do?

That’s a funny one … I am a CPA working in the casino industry, doing insurance and risk management, so neighbors and acquaintances think I either do tax returns or they think I’m a blackjack dealer at the casino!

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]