Although the general economy shows signs of a slow recovery, construction spending remains below November 2006 levels. When the construction playing field changed drastically as a result of the 2008 financial crisis, contractors found themselves spending more money chasing projects with significantly more competition and lower profit margins. Many were not financially or operationally prepared for this shift. Some did not survive, but many did through careful planning, confident leadership and solid decision-making. A key to survival was a close partnership between contractors and their critical advisors, including accountants, banks, insurance agents and sureties.
From Debt-Ridden to Steady Growth
A large road contractor had high growth aspirations but geared up at the wrong time. In a normal economy, purchasing new equipment to support growth opportunities was manageable. In a rapidly shrinking economy, prudent expense management would have been a better choice. Weighed down by idle equipment, maintenance costs and high operating leases, the contractor could not shed its leveraged fixed debt quickly enough, leading to a substantial operating loss.
While the contractor’s work continued to be excellent, internal communication needed improvement. A surety team with underwriting, accounting and engineering expertise helped facilitate improved communication and workflow between the contractor’s field leadership and financial operations, which were functioning in silos. The result was a realistic plan with buy-in from all parties.
The contractor shed debt, sold excess equipment, reduced materials inventory and canceled certain operating leases. While these self-help measures were being implemented, the surety and contractor agreed on reasonable underwriting requirements and acceptable benchmarks that allowed bonding capacity to be maintained.
Adjusting to the new economic reality was difficult, but today the contractor is healthy, steadily growing and generating double-digit million-dollar profits.
From Net Losses to Peak Performance
This heavy engineering contractor was in trouble even before the financial crisis began, as it was undergoing senior management transitions and recently finished a bad job that cost the company millions of dollars. Despite the shareholders contributing personal funds, the company had virtually no working capital, and lost half its net worth in the mid-2000s.
The surety’s underwriting staff partnered with the agency and the contractor to develop an action plan. The surety conducted peer group benchmarking to identify improvement opportunities. With a realistic recovery plan in place, the surety maintained a reasonable surety program to help achieve the agreed-upon goals. The contractor implemented new accounting and project management systems, hired top talent, established efficient workflows and realized total engagement from its employees.
Even in the midst of a prolonged construction recession, the contractor is now a solid performer with a diversified product set and revenue stream. Because the company has so many satisfied repeat customers, it can be selective in what it chooses to bid in the open market.
Tips for Contractors
Surety professionals zero in on common themes to survive a downturn.
- Assess timing. Is now the right time to invest in or buy equipment? Should the company focus on saving instead?
- Analyze processes. Could a new workflow or system help the company gain efficiencies?
- Ensure operational alignment. Do field and support personnel have the same objectives?
- Examine the firm’s workforce. Is everyone engaged and committed to success?
- Communicate frequently. Does everyone understand the objectives and the plan?
Additionally, partnering with a surety agent, a surety underwriter and other professional advisors is important. A good surety has a vested interest in maintaining a contractor as a strong ongoing customer. Sharing information is important to protecting bonding capacity. The surety should understand the contractor’s financials, evaluate its business plan and give advice (along with the contractor’s agent). By tapping into a national knowledge base of construction and economic trends, a surety can offer smart business solutions.
Absent accurate information and open communication, an underwriter may unnecessarily restrict a contractor’s surety capacity. A surety that is well-informed about its customers can provide mutually beneficial solutions that support a contractor’s business plan and reduce bonding risk.