North Carolina, South Carolina, and Virginia are outpacing much of the Southeast in building permits and economic activity, but the pace of growth is creating pressure points for the construction and surety markets.
“The Federal Reserve of Richmond recently released some economic data on the area, and it showed that North Carolina, South Carolina, and Virginia, as far as building permits, are exceeding the rest of the southeast region,” said Robert Coon (pictured), vice president of surety at Scott Insurance. He added that net migration into North Carolina now averages more than 100,000 annually, on top of natural population growth, and that South Carolina and Virginia were experiencing similar trends.
Contractors’ pipelines were “comfortably full,” though not at record highs. Still, there are weak spots. “Weaknesses where contractors are seeing a little bit of pullback and dryness are office and multifamily housing,” Coon said. Affordable housing has been stronger within multifamily, while other projects remained stalled, waiting for rate cuts. “If the Fed drops interest rates in the next few months, like they're expected to, that's going to take a lot of the projects that are on the shelf right now and move them forward,” he said.
While supply chain and pricing pressures have stabilized, labor remains a long-term challenge. “Labor is probably the biggest concern. It's a twofold issue. One is there's a significant concern about just having enough bodies to do the work. But a more nuanced issue is the quality of that labor force,” Coon said.
He pointed to mega projects such as data centers that have pulled away skilled tradespeople by offering better pay and longer contracts. “If you have a labor pool that's not quite as big as you want, and the quality of that labor isn't as high as you'd like, and then all of what is high quality focuses on a certain sector, the quality issues for the rest of the construction market become a little bit higher risk and higher focus,” he said.
That imbalance was already straining underwriters. “That, frankly, is something hard to underwrite or address,” Coon said. He expects the challenge to intensify if rate cuts trigger more project starts. “Labor is not something that fixes overnight. So, it will probably be an issue for the next five or 10 years, in my opinion,” he said.
Coon stressed that capacity is not the issue in surety underwriting. “Remember that surety is more of a credit product. It's underwritten on the basis that there will be no losses,” he said. Unlike insurance, bonds are written on the expectation of zero losses and carry no deductibles. “That bond's a 100% guarantee on the performance and 100% guarantee on the payment,” he said.
What matters most is a contractor’s fundamentals across all jobs. “One of the sureties did a study a few years ago where 55 to 60 percent of surety bond claims were triggered by – not the sole cause, but the main trigger – a loss on a single project,” he said. “Having one bad job has a domino effect, and it ended up affecting all of their jobs and taking that contractor out.”
Beyond labor and project risk, sureties are urging contractors to pay closer attention to contractual obligations. “Nobody wants to take risk. So we're seeing risk being pushed down from the owner to the general contractor, to the subcontractors,” Coon said.
One clause that has become increasingly costly is “no damages for delay,” which limits compensation for owner-driven or supply chain delays. Given longer material lead times and other issues slowing production, projects are taking longer than they used to. “If the only thing that [a] contractor or subcontractor can get is time, that doesn't cover their overhead, additional expenses that they're having to incur to keep that project open or going,” Coon said.
As a result, bond producers are more often working with contractors to challenge or rebalance contract language. “What we're seeing is sureties are looking at and helping advise their contractor clients, by reading the contract terms a little bit more closely to identify things that you could live with previously, but in the current environment, you need to push back and get a little bit more clarity,” he said.
Public-private partnerships (P3s) are also shaping the surety conversation. “Virginia has been very active in the P3 world. North Carolina has some, and in fact, they just released RFQs for a P3 project for I-77 in the Charlotte area to widen it and expand it,” Coon said. South Carolina is considering similar models.
He said the underwriting approach to these projects remains consistent, with contractors well-positioned to benefit. The concern lay in ensuring statutory protections were preserved. “The key underwriting issue is we want to be sure that those P3s and the enabling legislation require the bond just as if it were a public, regular public project,” Coon said.
For underwriters, the challenge in today’s market is balancing discipline with adaptation in a market marked by growth, volatility, and contractual complexity. According to Coon, contractors cannot afford to overlook the risk of how “one bad job” can cascade through their entire book of work.
