Construction Executive asked top executives at leading sureties and insurance companies specializing in construction for advice and insights on:
- What do contractors need to know about additional insured coverage when obtaining insurance?
- If there is a burst of construction activity under the Trump administration, what advice can you offer to contractors that might overextend?
- What insights can you offer as the practice of contractors purchasing surety bonds directly becomes more common?
- What are the benefits of the surety bonding prequalification process and how can contractors prepare for it?
What do contractors need to know about additional insured coverage when obtaining insurance?
Senior Vice President
McGriff, Seibels & Williams, Inc.
Subcontract documents typically contain insurance provisions that are grounded in the requirements for additional insured status for general liability. And while other provisions (e.g., waivers of subrogation and general liability limits) are all important, the key exposure to the general contractor seems to be such additional insured status and the language of the endorsement. Each insurance company produces its own endorsement and language, and while they may in fact follow the ISO suggestions, many endorsements contain restrictive language that hampers the coverage expected by the general contractor.
We recommend that contract administrative staff audit the compliance for their requirements to determine failure rate, follow-up and resolution. Too often, general contractors discover the limitations to their additional insured status after the loss occurs.
Conduct a review of endorsements and best practices and review the valuable information available through the International Risk Management Institute.
If there is a burst of construction activity under the Trump administration, what advice can you offer to contractors that might overextend?
Executive Vice President & Head of Construction Surety
Surges in construction activity invite growth and demand discipline. Managing your accounts receivable plays an essential role in strong cash flow. Solid bank credit is another key. Once your business plan points to the need for extended credit, work with your bank early on so that funding is available when you need it.
In addition, balance competitive pricing with the opportunity to improve your margins. Strong demand that outpaces supply allows contractors to command a greater profit on new work, which in turn can help mitigate financial glitches.
Assessing the terms and conditions of your contracts also can yield benefits. If terms have changed to shift risk from owners to contractors during the last several years, work with your attorney to ensure that the risk rests with the party that’s best able to control it.
Finally, because the construction labor market is stretched thin right now, contemplate potential changes in productivity and confirm that you have the talent you need to get the work completed.
Vice President, Contract Writing
Merchants Bonding Company
Industry surveys show U.S. contractors are gearing up for a burst of construction activity under the Trump administration. In one report, three out of four contractors plan to hire more workers to take on new projects.
Surety professionals are advising contractors to tread carefully and avoid the temptation to overextend.
Tight labor markets have put the problem of increased overhead front and center. Contractors are challenged to find qualified people to fill new jobs, as well as offer increased wages or other incentives to retain qualified labor.
Carefully monitor any increase in overhead. Mismanagement of overhead was a key factor that destroyed the balance sheets of many contractors in recent years, and even put a few out of business. Smart and sophisticated contractors will predict labor shortages and adjust accordingly.
The profitable contractor of the future will remain disciplined and manage overhead through strict controls, which will lead to profitable operations if the burst of construction activity takes shape.support to make that path to larger bonded contracts seem easy.
Vice President & Chief Underwriting Officer
The Guarantee Company of North America USA
President Trump’s plan to spur economic growth by investing in infrastructure is sparking guarded optimism in the construction sector, but overextension is a key risk contractors must mitigate in a growing economy. The importance of risk managers continues to grow as they evaluate opportunities and implement safeguards to ensure the company’s success.
Skilled labor shortages are already a mounting concern for the construction industry so companies need to ask themselves whether they have the workforce to successfully execute backlog.
Strengthen your organizational partnerships. Engage the services of a construction-savvy CPA firm that can guide you through the anticipated expansion period with necessary job costing systems and appropriate internal controls. Additionally, partner with a surety professional agent who can match your construction company’s business aspirations with the right surety partner to support your plan of success.
We often refer to your insurance program as a living, breathing entity. What does this mean? Your insurance program should grow as you grow. Does your program have the ability to accommodate the changes you may encounter as new risks emerge, or the need to increase “packaged” limits as your needs increase? If it does not, or you have unexpected growth, set up a time to talk to your agent. As a trusted business adviser, your agent can ensure you are protected from outside threats. Moving from a reactive to proactive strategy will position you for growth and change.
Growth also may mean additional labor needs. Some contractors are not aware of the Affordable Care Act (ACA) regulations that may impact their business. Once a company reaches 50 full-time employees, they are required to follow all ACA regulations.
Be sure to continuously examine your risk management strategy with your agent to confirm you are adequately covered and are in compliance with government regulations.
Jack A. Callahan
Industry Practice Leader
There is real optimism that our new presidential administration will deliver on the promises of huge infrastructure spending. Contractors should be encouraged, yet cautious, and proceed with a clear plan and vision supported by their own specific economic and organizational constraints. Exercising prudence is key. Even the most successful firms can be inclined to take on more than they can deliver, which can result in failure.
With federal funding will likely come Federal Acquisition Regulation (FAR) compliance. Is your organization prepared for that? Given the contentious political climate, any projects funded through these plans will be subject to a great deal of scrutiny. Be sure your organization can stand up to such transparency needs.
Global events also could play into a contractor’s decision. For example, will banking and financing be available? Will the price of steel and other overseas construction materials spike? What will the skilled labor market look like?
What insights can you offer as the practice of contractors purchasing surety bonds directly becomes more common?
Henry W. Nozko, Jr.
ACSTAR Insurance Company
Many sureties do not accept or write direct business. Therefore, a contractor will usually gain access to more surety proposals simply by engaging the services of a surety agent. Sureties may be more inclined to decline, or offer less generous terms, when negotiating directly with a single contractor. In contrast, a surety agent is usually able to leverage a better package of terms and conditions on behalf of a contractor because the surety agent has the buying power of representing several contractors.
A qualified surety agent has a good understanding of the different types of relationships that are possible and available from many different surety companies. An expert surety agent can usually match the most accommodative surety to the specific needs of a given contractor. The agent also can assist a contractor with developing the best possible presentation to surety companies, review and consult on contracts, and provide valuable insight from experiences working with various owners and other contractors.
What trends are you seeing in owners’ expectations for design-build projects?
Ronald G. Robey
Smith, Currie & Hancock, LLP
Owners of large projects are seeking to hold design-build contractors to a “perfect,” often subjective standard—seeking to hold them liable for any and all design defects (whether negligent or not), similar to product manufacturers. This shows up in contract clauses creating “super-standards of care,” “super-warranties” and “super-indemnities,” requiring that construction design and workmanship be “free of defects and deficiencies.”
Not only is it essentially impossible to provide perfect designs and construction, losses caused by failing to meet the perfection standard are largely uninsurable and are “stranded” with the contractor; that is, the contractor cannot push the risks to an insurance carrier or design professional because carriers insure only performance up to the standard of care, and design professionals will not agree to accept liability for failing to meet the higher standard. While the insurance industry offers coverage for such liability for manufactured goods, it has yet to offer any similar coverage for construction.
What are the benefits of the surety bonding prequalification process and how can contractors prepare for it?
Vice President, Underwriting
Old Republic Surety Company
Being ahead in the process with bond prequalification can be a huge competitive advantage in addition to potential improvement in overall business processes, systems and reporting. Contractors should meet with a knowledgeable surety professional to identify weaknesses. The process could include a review of internal financial reporting and costing systems, the quality of the CPA financial statements, flaws in contractual language and succession plans.
Contractors that want to grow should be poised for every new opportunity. Working with a surety professional for prequalification is an essential part of this positioning.
To prepare for the prequalification process, a contractor should provide the contractor’s questionnaire, financial information, banking information and organizational information. Be prepared to discuss the entire operation, management, staffing and ownership details. Showing a willingness to learn and improve is essential. The surety will be looking for the complete picture of the contractor’s ability to accomplish the work.