Knowledge Corner

TSIB Surety Producer Mike Dugan dives into Where construction risk is headed and how the surety bond market is responding in his 2026 Surety & Construction Forecast blog below.

A Market That Is Busy, But Not Completely Carefree
Moving into 2026, the construction industry presents a mixed picture. While activity levels remain elevated and some segments show strength, contractor sentiment has dampened notably from a year ago. Capital is still flowing into large-scale development, and public infrastructure spending continues to provide a strong foundation. However, despite these positive indicators, the mood in construction may be shifting against a backdrop of strong 3rd-quarter 2025 GDP growth that's masking employment weakness.

Contractors are busy, but they aren't relaxed about it. Owners are funding projects but asking more questions up front. Sureties are supporting growth, but they’re being more selective about where and how they deploy their support. This is a market that has learned some expensive lessons and adjusted accordingly. These evolving dynamics set the stage for understanding the structural shifts underway in the construction and surety sectors as the industry moves into 2026.

The past several years taught the industry about supply chain chaos, labor volatility, and inflation shocks at firms that looked bulletproof on paper. Those lessons stuck. In 2026, construction isn't pulling back, but it's recalibrating, and the surety market is doing the same.

The numbers tell the story. After a relatively mild 2022 (16.5% combined loss and DCCE ratio, per Surety & Fidelity Association of America subscription data), the surety industry saw losses jump to 24.8% in 2023 and then further increase to 26.4% in 2024. Early 2025 results show some improvement, with the direct loss ratio moderating to 20.7% across the top 100 writers through the third quarter, though whether this represents sustained improvement remains to be seen.

The lessons from recent years are still fresh, and they're informing underwriting decisions now.

The Construction Market in 2026: Strength (with Some Tension)
From a top-down perspective, the construction outlook for 2026 looks promising. Total construction spending remains elevated, particularly in nonresidential sectors.
The big drivers are data centers, energy infrastructure, semiconductor plants, healthcare, and select public works. However, AGC’s 2026 outlook survey reveals significant divergence: education construction has turned negative for the first time since 2021 (K-12 at -1%, higher education at -5%), while lodging (-7%), private office (-14%), and retail (-18%) show increasingly weak expectations. Federal work expectations dropped sharply from +22% to just +5%.
At the same time, the nature of risk has shifted.

Projects are bigger, technically complex, and scheduled more tightly than ever. Owners increasingly expect certainty on delivery timelines, even though labor availability is still inconsistent industry-wide and productivity improvements haven't kept pace with investment. 

Material price escalation has cooled compared to the madness of 2022–2023, but it hasn't gone away entirely, and labor costs keep climbing in most markets. Tariffs compound this pressure—with most firms either raising bid prices, passing costs through, or simply absorbing margin hits on materials affected by trade policy.

Owners are pushing risk downstream more aggressively than in prior cycles. Contract terms have tightened—liquidated damages provisions are more punitive, and schedule milestones come with real financial penalties. Design-build and design-assist structures are shifting design risk to contractors who may not be fully equipped to absorb it.

The interest rate environment adds another layer. The Federal Reserve (Fed) cut rates 3x in 2025, bringing the federal funds rate down to 3.50%–3.75% by year-end, but financing costs for construction remain elevated relative to the period when much current work was bid. The Fed has signaled a near pause on rate cuts, and Powell's term as Fed Chair expires in May, with the current administration favoring more aggressive rate cuts. Markets are pricing in a more dovish Fed under new leadership, but the transition itself introduces volatility.

The result: revenue visibility is strong, but margin durability is fragile.

This matters because sureties don't just underwrite backlog, they underwrite the outcome of that backlog. This year, outcomes will depend less on whether work simply exists and more on whether it can be executed predictably.

Labor, Productivity, and the Execution Question
Labor is still the biggest headache entering 2026. Hiring conditions vary by region and trade, but the broader problem isn't just finding people, it's keeping them and getting consistent output. High turnover, skill gaps, and heavy reliance on subcontracted labor keep introducing unpredictability into project performance. Critically, fully 1/3 of construction firms report being affected by immigration enforcement actions. This compounds existing labor shortages with actual workforce exits, not just hiring challenges.

Recent economic data reveals a deepening disconnect. While Q3 2025 GDP accelerated to 4.3%, November job creation totaled just 64,000—with construction adding 28,000, representing nearly half of all gains. Unemployment reached 4.6% (highest since September 2021). The broader economy is growing through productivity gains, but construction remains labor-intensive and can't productivity-gain its way out of execution risk. Construction has staffed for continued robust activity while the broader employment picture weakens. While a majority of contractors still expect to add headcount, hiring expectations for 2026 have softened from prior years. Even committed projects face delays, rescoping, or payment timing issues when owner priorities shift. Contractors who expanded aggressively in 2023-2024 would face revenue gaps while carrying elevated fixed costs—precisely when margin pressure from execution issues could compound financial stress.

What makes this worse is that productivity gains haven't kept up with wage growth. Despite real investment in technology, scheduling software, and project controls, many contractors will tell you privately that productivity improvements are incremental at best. The tech helps, but it's not transforming execution the way everyone hoped it would.

The stress isn't just at the GC level—it's compounding in the subcontractor tier. Specialty trades are stretched thin, particularly in electrical, mechanical, and building envelope work. Many subs are thinly capitalized, absorbing labor cost increases with limited negotiating leverage, and dealing with payment timing issues that strain cash flow even on profitable work. Recent loss data shows subcontractor claims have increased while loss severity has ticked higher—deterioration in both frequency and severity simultaneously. A GC can look stable on paper while sitting on a backlog where 20% of their critical subs are quietly struggling. That risk doesn't show up in the GC's financials until projects start falling behind schedule.

From a surety perspective, this is critical. Execution risk—not financial leverage—is now the primary concern. Projects fail today not necessarily because contractors ran out of money, but because schedules fell apart, crews couldn't keep pace, or coordination broke down across complex scopes. 

In 2026, the best-positioned contractors aren't necessarily those with the lowest labor costs. They're the ones with the most realistic assumptions baked into their bids.

How the Surety Market Is Responding
The surety market enters 2026 in good shape structurally. Capacity is ample, competition among carriers is healthy, and the industry still benefits from decades of conservative underwriting discipline. Premium volume has grown more than 40% since 2021, reflecting both construction market strength and competitive appetite.

However, that growth came at a cost. Loss emergence in 2023-2024 suggests much of this expansion was underwritten with assumptions—about labor availability, schedule predictability, and margin durability, that proved optimistic. The industry is now recalibrating, not by pulling back capacity, but by scrutinizing assumptions that went unchallenged during the growth phase.

Capacity isn’t changing—it's selectivity.

Sureties aren't willing to underwrite based on historical reputation or projected growth alone. They want to understand how contractors make decisions, how risks get managed internally, and how problems get identified before they turn into claims. That's a different conversation than it was several years ago.

This shows up in tangible ways: more focus on interim reporting and job-level transparency (not just year-end and interim financials), real scrutiny of aggressive growth strategies, less patience for repeated "one-time" explanations in WIP schedules, and more dialogue around bid discipline and project selection criteria.

Another signal: defense and cost containment expenses as a percentage of earned premium have risen from 1.9% in 2022 to 2.9% in 2024, per SFAA data. This reflects not just losses, but the increasing complexity and cost of managing troubled projects. More jobs require active intervention, completion contractors, extended negotiations, and litigation.

This isn't a "hard market" in the traditional sense. It's a market that absorbed painful lessons and adjusted its standards accordingly. Underwriters have longer memories now.

Private capital remains active across the sector, especially focused on specialty contractors. This capital has brought stronger balance sheets and professional management, but also pressure for growth and shorter timelines for returns. For sureties supporting PE-backed contractors, capital that's committed, patient, and transparent gets rewarded. Capital that's highly levered, focused on distributions, or misaligned with long-duration project risk gets scrutinized hard.

Market Segmentation: How 2026 Plays Out by Contractor Size
Small contractors have access to bonding in 2026, specifically in public work, specialty trades, and private development. Funding is available, and owners value the competition and flexibility that smaller contractors provide. However, the margin for error has narrowed. Sureties are paying closer attention to cash flow, underbilling trends, and reliance on key employees. Informal financial practices that may have been overlooked in a more forgiving market may be questioned. Small contractors that invest in financial discipline, build relationships with competent construction-oriented CPAs, and manage backlog conservatively (and profitably) will continue to find support.

Mid-market contractors have outgrown small bonding programs but haven't yet achieved the scale of larger firms. Unfortunately, these contractors are often chasing larger, more sophisticated projects, competing against national players, and managing multiple work fronts at once and face the most complex environment in 2026. The opportunities are real, but so are the failure points. Firms that demonstrate disciplined bid review, realistic scheduling assumptions, and a willingness to walk away from marginal work, receive much better treatment than those chasing growth at any cost. In 2026, mid-market contractor success is less about expansion and more about control.

Large contractors and high-profile mega-projects continue to define the top end of the market. Surety capacity for these projects remains strong but increasingly sophisticated. Traditional full-penal-sum bonding is still central, but on mega-projects it's now often one component of a broader risk management framework. This might include co-suretyship arrangements where multiple carriers share exposure, parent company guarantees backing the contractor's obligations, or partial bonding supplemented by letters of credit or other security. These structures reflect the reality that as projects grow larger relative to any single party's balance sheet, risk-sharing becomes more sophisticated. For large contractors, a surety bonding strategy is no longer a compliance exercise. It's part of project planning and contract negotiation from the earliest stages. Scale matters, but discipline matters more.

Downside Risks the Market Should Be Watching
While the surety market enters 2026 from a position of relative strength, there are legitimate pressure points worth acknowledging. These are the kinds of risks that could shift the landscape faster than contractors expect.

Economic slowdown or recession
The risk isn't that work disappears entirely, it's that projects get postponed, rescoped, or stretched out in ways that leave contractors carrying fixed costs against declining revenue. Owners facing their own capital constraints or uncertainty about future demand will slow decision-making, delay starts, and renegotiate scope mid-stream. A broad economic pullback would compound execution risks already straining margins, turning what are currently selective project delays into systemic revenue gaps for firms that expanded aggressively during the recent growth phase.

Data center backlog concentration
The rapid expansion of data center construction has created significant backlog concentration among large GCs. The demand is being driven primarily by 5-7 hyperscalers (Microsoft, Google, Amazon, Meta, Oracle). The projects are massive, timelines are compressed, and the assumption is that AI computing demand will continue accelerating indefinitely. What makes this interesting from a surety perspective is that these projects look safe on paper, but schedule compression is creating execution pressure, and power grid constraints in key markets could force project delays or cancellations. Since so much contractor backlog is concentrated in this segment, with the same handful of owners, a sector pullback would create correlated exposure across multiple projects simultaneously.

Labor cost acceleration 
Many fixed-price contracts have limited or no escalation protections for labor and the labor cost acceleration is outpacing contract adjustment mechanisms. If wage pressure accelerates beyond what's currently baked into forward pricing, margins could compress quickly.

A mega-project failure
The industry hasn't seen a catastrophic mega-project collapse in recent years. A single $2 billion project failure, specifically one involving a well-regarded contractor and revealing systemic execution issues — could significantly shift risk appetite across the market. We saw this with Boston's Big Dig, which exploded from $2.8 billion to over $15 billion and culminated in a fatal tunnel ceiling collapse in 2006. The fallout changed how sureties and owners approached urban infrastructure mega-projects for years afterward. One high-profile disaster can quickly rewrite underwriting standards.

A major concern is one or more of these occurring simultaneously, in a way that turns a healthy, selective market into a defensive one.

A Market Defined by Experience
The 2026 construction and surety environment isn't necessarily constrained, but it is discerning. Activity levels are strong, capital is available, and opportunity exists across all market segments. Yet, the collective experience of recent years has reset expectations across the board.

For contractors, the message is straightforward: bonding capacity follows clarity, discipline, and trust, not projections and optimism. Transparency matters more than ever. Contractors that can explain not only what happened on a project but why and what they learned builds trust that pays dividends when capacity matters most. For sureties, the role remains what it's always been: support construction activity while insisting on accountability.

TSIB’s Risk Consultants are currently servicing the following locations:
East Coast: New York City, NY; Bergen County, NJ; Fairfield County, CT; Philadelphia, PA
Texas: Austin, San Antonio, Houston, Dallas
California: Orange County, Los Angeles County, Riverside County, San Bernardino County, San Diego County

Image credit: https://stock.adobe.com/contributor/201189201/unkas-photo