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.”
