Owners Shift More Financial Risk as Recovery Remains Sluggish

Burdened by a sluggish economic recovery, cash-strapped public and private owners are shifting greater risk onto contractors through onerous deal terms with non-traditional project responsibilities.

Contractors, as a result, must be alert to new risks, resist them whenever possible and keep costs low to stay profitable.

That was the consensus of presenters during the AGC/CFMA Construction Financial Management Conference, which took place Oct. 23-25 in Las Vegas.

The financial consequences of the risk-shifting are hitting subcontractors first since “they are furthest from the cash flow,” says Teresa Martin, vice president of Lockton Cos. LLC, Kansas City. The subs borrow more as costs rise and payments drag out, she said.

For several years, brokers have said that gradually increasing but not yet alarming surety loss ratios may mask differences based on size and market share. Top sureties with large, reliable clients and the majority of the bonded contract value report significantly lower loss ratios than smaller sureties with more small general and specialty contractor clients.

At the same time overall losses are manageable but creeping higher, sureties are unable to increase premium.

“Surety rates are down as new players join the fray and dilute prices with added capacity, helping drive profitability down 50% through June 2013” compared to the prior year, says Rick Ciullo, chief operating officer of Chubb Surety, Warren, N.J.

Meanwhile, greater reliance on technology and increased collaboration, including public private partnerships and design-build, are “clouding how insurers respond to claims,” says Danette Jones, senior vice president, Marsh Inc., Los Angeles.

The volume of teaming projects nearly tripled between 2005 and 2011, with103 jobs in excess of $1 billion in 2011 up from none six years prior.

“We’re seeing larger, more complex project that require collaboration and communication,” says Brian Perlberg, executive director, ConsensusDocs, Alexandria, Va.

“The margins have never been shorter and tighter, making it easy to find yourself in financial trouble. You can’t even trust the solvency of a surety and whether a public owner has the project appropriation. Sometimes, public owners are trying to leverage money they don’t have,” Perlberg says.

Yet, contractors still hesitate to modify or request contract changes from owners due to rocky market conditions and initial excitement and gratitude over winning work, says Frank Riggs, co-chair of Atlanta-based Troutman Sanders LLP’s Construction Practice Group.

Slippery contract language, owner retainage, and pass-through damages contributed to a 22.8% construction industry operating loss ratio in 2012, says Lawrence Mitchell, chief underwriting officer for Travelers Bond Construction Services’ Western Region.

However, contractors can protect payment rights through owner prequalification, direct lender communication and careful review of project contract terms, including risk-shifting language such as pay‐if‐paid clauses, no‐damages‐for owner delays and overly‐broad lien waiver forms.

“Banks have tighter control over lending authority, and contractor competition is still very fierce,” Riggs says. “It’s important to protect yourself and RTFC: Read The Freaking Contract.”

Source: Engineering News Record