2026 Surety and SDI mid-year state of the market

The construction economy has shifted meaningfully since the start of 2026. Overall activity remains positive, but growth is increasingly concentrated in a small number of large, capital-intensive projects, particularly data centers, while manufacturing, residential, and conventional commercial construction have cooled. Material and financing costs remain elevated, and while the labor market is loosening outside the hottest regional markets, contractors continue navigating economic uncertainty and uneven opportunity.

Summary

The snapshot below summarizes the year-over-year shift across the indicators that matter most to contractors and their sureties.

Source: AGC Data DIGest and CBIZ Construction Vital Statistics¹

Backlog and construction starts are healthy overall, but the strongest gains are concentrated among contractors participating in data center work, with 11.6 months of backlog compared to 8.6 months for those without.² ABC’s Construction Backlog Indicator reached 8.8 months in April 2026, with contractors generating more than $100M in annual revenue recording the strongest gains.³

The expansion remains disproportionately concentrated in data centers and other capital-intensive projects, reinforcing that larger firms are pulling away from smaller regional contractors in both backlog and pricing power. Meaningful opportunities continue to emerge outside the data center sector, with military, healthcare, and retail construction all outperforming the broader market.

Several structural risks warrant attention heading into the second half of 2026. IIJA funding authorization expires at the end of September, and ongoing geopolitical conflict in Iran has the potential to increase energy, shipping, and material costs. Construction input prices accelerated at a 12.6% annualized pace over the first two months of 2026, a figure that does not yet reflect the oil price spike triggered by the Iran conflict that began in February.⁴ Continued escalation may cause owners to defer or shelve projects if budgets become unsustainable, a signal worth monitoring for bid volume in the second half of 2026.

Underwriters also recognize that rapid expansion can elevate contract failure risk. Confidence and overextension may pose a greater threat to surety programs than economic downturns. Mid-market contractors pursuing larger opportunities face heightened exposure when project size outpaces financial controls, labor management, or operational capacity.

These dynamics reinforce the importance of disciplined planning, financial visibility, and thoughtful growth strategies for contractors. The Baldwin Group helps contractors navigate evolving conditions with tailored surety strategies that support business objectives today while preparing for the challenges and opportunities ahead.

Surety

This section focuses on contract surety, the dominant segment for construction firms. Commercial surety trends, which include license, permit, and court bonds, remain stable and are not materially influencing construction outcomes at mid-year 2026.

Market conditions

The surety market entered 2026 with strong momentum, but first-quarter results suggest it may be reaching an inflection point. Direct written premium across surety writers reached $3.13B through the Q1 2026, up approximately 9.6% from $2.86B during the same period last year, continuing the industry’s sustained premium growth.

However, the direct loss ratio increased to 23.8%, from 20.8% in the first quarter of 2025 and above the 20.5% reported through the third quarter of 2025.⁵ This may be an early signal that the loss deterioration reinsurers and rating agencies have been flagging as an emerging risk is now showing up in the numbers themselves.

One quarter does not establish a trend, particularly in a line where claims often develop over several years. The surety market remains fundamentally well-capitalized and highly profitable by historical standards. The industry’s 45.6% net profit margin in 2024 was its strongest since 2014, bonding capacity remains robust, and pricing has stayed remarkably stable, with increases below 1% in 13 of the past 14 quarters. Competition for well-managed contractors also remains strong, supporting continued capacity for firms with disciplined financial performance and execution.⁶

The underlying market tells a more nuanced story. Defense and cost-containment expenses as a share of earned premium have increased substantially, signaling that today’s losses increasingly require completion contractors, extended negotiations, and litigation rather than straightforward payouts.

The increase in the first-quarter 2026 loss ratio aligns with that trend, as larger, more complex projects produce claims that take longer and cost more to resolve. While the market remains healthy, these developments reinforce the importance of disciplined underwriting and continued monitoring as construction market conditions work their way through surety results.

Key developments

Regional labor divergence

Construction employment is diverging across regional markets, growing year over year in just 42% of metro areas tracked by AGC while declining in 45%. Hiring remains strongest across the Gulf Coast and Midwest, while many West Coast markets continue to soften.⁷ For sureties, regional differences reinforce that backlog quality and geographic concentration matter as much as backlog quantity when evaluating risk.

Tariffs and input costs

Tariff-driven material cost escalation is accelerating rather than stabilizing. Nonresidential construction material prices increased 9.7% year over year in May, up from 7.4% in April and 5.4% in March, while the National Association of Surety Bond Producers reports material price increases approaching 50% for some products since tariffs took effect.⁸

Higher contract values are increasing bond penalties and premium, but they are also raising the financial stakes of every bonded project, particularly for contractors that priced work before the latest round of cost increases.

IIJA expiration uncertainty

Federal authorization under the Infrastructure Investment and Jobs Act (IIJA) expires at the end of September 2026, and its long-term successor remains uncertain. The House Transportation and Infrastructure Committee advanced the BUILD America 250 Act as the leading reauthorization proposal, which would allot roughly $474B in guaranteed Highway Trust Fund contract authority alongside another $106B subject to future appropriations.⁹

However, the Highway Trust Fund (HTF) continues facing a significant structural funding gap. A five-year reauthorization at IIJA-level spending would face a projected $166B shortfall between HTF revenue and outlays, with a six-year bill closer to $199B. Since 1991, Congress has allowed every surface transportation law to lapse into a short-term extension rather than passing a timely successor.

For sureties and their contractors, the practical risk is less a hard funding cliff, but rather a prolonged uncertainty. The HTF is expected to carry roughly $45B at expiration, enough to keep federal agencies paying already obligated work into 2027 and, for highway programs specifically, potentially into early 2028 before delays begin.¹⁰

That cushion buys time, but it does not eliminate the risk of delays in new project awards while Congress negotiates a successor bill, particularly for contractors whose backlogs lean on non-highway and non-formula programs, which remain the most exposed to funding reductions under the current reauthorization proposals.

Private equity and ownership transitions

Private equity and ESOP investment continue reshaping contractor ownership, bringing stronger balance sheets to many firms while also introducing new expectations around growth and returns. Sureties continue drawing a clear distinction between ownership structures. Patient, transparent arrangements aligned with long-duration project risk continue to be well received, while highly leveraged structures focused on shorter investment horizons draw heightened scrutiny.

Because every private equity and ESOP structure is unique, early and transparent communication remains essential to preserving bonding capacity through ownership transitions.

Megaproject concentration

The continued surge in data center, semiconductor, and advanced manufacturing construction is reshaping subcontractor availability nationwide, while the financing behind much of that growth warrants closer scrutiny. Much of the AI-driven data center boom runs through complex, off-balance-sheet structures. Hyperscalers have moved well over $120B in data center spending into bankruptcy-remote special purpose vehicles backed by private credit, and total data center debt issuance nearly doubled year over year in 2025.¹¹

At the same time, announced demand continues to outpace what is actually financed, grid-ready, and under construction. More than 75 projects, representing roughly $130B, were blocked or delayed by local opposition and financing setbacks during the first quarter of 2026 alone.¹² The combination of real demand layered on top of speculative capital means not every announced data center project will ultimately be completed, and contractors need to underwrite that possibility in their contracts, not just their backlogs.

A well-drafted right-to-stop-work clause, which allows a contractor to suspend performance after written notice and a cure period if the owner, developer, or financing party fails to make an undisputed progress payment, remains one of the most important contractual protections on these projects. While it cannot prevent an owner’s bankruptcy, it can limit a contractor’s downside by allowing work to stop before additional unpaid labor, materials, and equipment accumulate. That protection should be paired with upfront diligence on the project’s financing structure and the creditworthiness of the ultimate payer, rather than waiting until a payment is missed.

Sureties are underwriting these risks closely and increasingly expect to see them addressed in contract language before extending capacity on the largest megaprojects.

Surety reinsurance

Surety reinsurance capacity remains broadly available, helping sustain a competitive primary surety market despite several years of rising loss activity. Surety continues attracting new capital because of its long-term profitability and growth opportunities, as well as its relatively low correlation with broader insurance market cycles. Softening property market conditions have also increased interest from both existing and prospective reinsurers seeking diversification.

However, recent losses are beginning to influence underwriting behavior. Reinsurers have absorbed much of the increased volatility rather than primary surety companies, with the gap between direct and net loss ratios widening to approximately 6 to 7 percentage points in 2024 and 2025 compared to an average of roughly 3 points during the previous five years. At the January 1 renewals, pricing remained generally flat, but reinsurers increasingly differentiated between well-performing and challenged portfolios while applying greater scrutiny to exposure growth, portfolio performance, and higher-risk sectors, including renewable energy, offshore oil and gas, and certain commercial segments.¹³

Terms, conditions, and attachment points have remained largely stable, and additional limit continues to be available in many cases. Primary surety insurers have also increased retentions, giving them more skin in the game and increasing their net exposure to loss. As contractors pursue larger, more complex projects, capacity is also being shared across multiple sureties more frequently, increasing coordination requirements among participating sureties and creating additional aggregation risk for reinsurers. While reinsurance capital continues supporting a competitive surety market, underwriting differentiation is becoming more pronounced as reinsurers balance growth opportunities with long-term profitability.

Looking ahead

Bonding capacity remains ample for financially strong, well-run contractors, but first-quarter 2026 loss ratio data suggest the market’s multi-year run of improving profitability may be leveling off. Rising input costs, concentrated megaproject risk, regional labor divergence, and an uncertain public-funding outlook make proactive communication with your surety partner more valuable than at any point in the past two years.

Surety capacity remains fundamentally healthy, but rising project complexity, larger bond penalties, and evolving reinsurance dynamics reinforce the importance of disciplined underwriting and proactive risk management. Contractors that maintain strong financial visibility, communicate early, and proactively address emerging project risks will be best positioned to preserve bonding flexibility and capitalize on opportunities as market conditions continue to evolve.

The Baldwin Group helps contractors navigate evolving conditions with tailored surety strategies that support business objectives today while preparing for the challenges and opportunities ahead.

Subcontractor Default Insurance (SDI)

Market conditions

The SDI market remains stable, supported by committed insurers and disciplined underwriting. However, the rapid expansion of megaprojects, particularly data centers, is reshaping subcontractor risk and underwriting priorities. Larger trade packages, growing labor constraints, and increasing project complexity are prompting insurers to place greater emphasis on subcontractor capacity, financial resilience, and operational execution while maintaining support for well-managed programs.

Key developments

Megaprojects reshape subcontractor risk

The rapid expansion of data centers and other megaprojects continues to reshape SDI underwriting and subcontractor risk, particularly for mechanical, electrical, and plumbing (MEP) trades. Large MEP trade packages are stretching subcontractor capacity, requiring project teams to evaluate not only technical expertise but also whether firms have the manpower, liquidity, and operational infrastructure to successfully deliver work at an unprecedented scale. Contractors involved with megaprojects should contemplate their overall risk tolerance. Based on available capacity and cost considerations, SDI may not be the best performance security mechanism for every project.

Contractors are also more frequently taking on packages that exceed their historical experience, heightening concerns around execution risk and subcontractor resilience. In some cases, subcontractors are assuming packages 20% to 50% larger than any they have previously performed. Identifying and reviewing the full scope of a subcontractor’s ongoing and pending commitments is paramount. Project teams should also evaluate whether subcontractors have the operational capabilities to successfully execute larger scopes of work and determine whether risk mitigation plans (RMPs) are warranted.

The effects extend beyond the projects themselves. As labor shifts toward mission-critical work, contractors across affected regions face greater challenges securing skilled trade labor and maintaining project schedules. Megaprojects are competing aggressively for skilled labor, driving workforce shortages and increasing pressure on subcontractors supporting smaller, conventional commercial construction. Some megaproject developers are offering incentives such as onsite fitness centers, meals, and cash bonuses to attract workers, which have become key differentiators in a competitive labor market.

While SDI insurers are willing to provide coverage for megaprojects, concerns around subcontract size, manpower, and overall aggregate exposure are shaping the underwriting process. As a result, excess SDI limits are becoming more prevalent, with most insurers willing to provide excess capacity, albeit at a cost.

Claims severity continues to rise

Though claim frequency has remained relatively stable, claim severity continues to increase as larger subcontract values, complex rework, and specialized replacement labor drive higher default costs. Rising claim values are attributable not only to the increasing size of subcontracts enrolled in SDI programs, but also to the extensive rework often required to remediate defaults. Electrical and other MEP trades remain disproportionately represented in SDI claims, reflecting both the technical demands of mission-critical construction and the operational strain placed on specialty subcontractors working across multiple large-scale projects. A disciplined quality assurance and quality control (QA/QC) program remains one of the most effective tools for reducing costly rework and limiting claim severity.

Looking ahead

The SDI market remains well supported by committed insurers, but underwriting discipline continues to increase as megaprojects reshape subcontractor risk. Contractors pursuing large, technically complex projects should expect heightened scrutiny of subcontractor capacity, operational maturity, labor planning, and financial resilience. Organizations that strengthen subcontractor prequalification, project controls, documentation, and quality management will be better positioned to secure favorable underwriting outcomes while managing the growing complexity of mission-critical construction.

The Baldwin Group partners with contractors to navigate an evolving landscape, delivering tailored surety solutions that drive business objectives today and build resilience for tomorrow.

Turn insight into action

Construction opportunities remain abundant, but success increasingly depends on disciplined execution. As megaprojects reshape the market and project complexity grows, contractors must balance financial strength, operational readiness, and thoughtful risk management. The firms best positioned for long-term success will be those that pursue opportunity without outpacing their capacity to deliver.

The Baldwin Group’s Surety and SDI practice helps contractors navigate this evolving landscape with strategies tailored to their business objectives. By aligning bonding capacity, subcontractor risk management, and long-term growth strategy, we help organizations pursue opportunity with greater confidence and control.