CE This Week interviewed Gregg Lyon, chief strategy officer for bond construction services, strategic initiatives and product management at Travelers on the impacts of COVID-19 on contractors, contract surety bond losses, risks and project selection.
CE This Week: COVID-19 has impacted most industries, including construction. What impacts have you seen?
Gregg Lyon: The construction industry has done a remarkable job of weathering the storm over the past 18 months, truly demonstrating what a vital industry it is during a time of profound uncertainty. The government’s Paycheck Protection Program money has been a boost to many balance sheets, helping contractors get through what could have been a crippling year. However, it’s not a time to let our guard down when focusing on areas of improvement for the long-term health of a business.
CETW: Travelers has been conducting contract surety loss studies. What have the results shown?
GL: As one of the largest surety companies, Travelers has the benefit of seeing first-hand how successful construction businesses are run. We also get an up-close look when contractors fail. Each year we review our 10 largest contract surety losses to understand what these companies did (or didn’t do) to suffer such a significant loss. We’ve been conducting this study for 12 years now, and the results of the study are rather telling about the risk our contractor clients take on every day. Some of the biggest takeaways we have from this study are:
- one catastrophic project can take a company down;
- a lack of sound internal controls and best practices is a major contributing factor to the problems that threaten the long-term viability of any company; and
- decisions at the time of project selection can have long-lasting effects.
CETW: What steps can contractors and construction companies take to avoid some of the issues found in the contract surety loss studies?
GL: While these risks are inherent to construction, there are actionable steps a contractor can take to avoid many of the pitfalls that make construction such a risky business, ensuring their company is positioned to enjoy long-term success.
First, an assessment of internal capabilities is a must—are there sound best practices in place around go/no-go decisions, cost and budget updating procedures, subcontractor prequalification, project selection and integrated software systems? Most importantly, is the company adhering to the best practices they’ve identified as major contributors to their organization’s culture?
Many companies believe they have strong procedures in place, but only after taking an objective look at themselves, or engaging a third party to help, can they really be certain of how effective these strategies are? For this reason, Travelers Construction Services group created a product called Project Loss Insurance which is designed to mitigate the financial impact of a catastrophic project, with an underwriting process that includes an assessment of internal control capabilities. No contractor is immune from these risks; however, every company can be purposeful in how they mitigate them.
CETW: How important is project selection in terms of project success and risk?
GL: It may sound elementary, but project selection is arguably the most important thing any contractor does. Of course, contractors need to secure work to have a thriving business, but it’s the process they go through in deciding which projects to take on that truly differentiates successful businesses from the pack.
Some companies get themselves into the most trouble when they stray from their core business. The further they get from what they know best, the more elevated the risk. We like to call this concept the “news,” specifically, the number of new characteristics being undertaken with a particular project (new owner, new territory, new type of work, new procurement method, new job size, new risk/return expectations, new people).
Every time a “new” is introduced, the likelihood that a job will underperform increases. This doesn’t mean a “new” can’t be taken on, but if the key people in the company aren’t fully aware of the additional risk(s) when they assess that opportunity and make risk mitigation and return decisions, then the overall backlog risk will change without leadership realizing. We call this “risk creep.” One downside to risk creep is that the company may earn the same return, but on a backlog of work that warrants a much higher return given the risk profile.
CETW: What are some best practices contractors can implement if presented with a job that is out of the ordinary?
GL: All too often we see companies resting on their laurels when it comes to internal controls and job selection, convincing themselves they can “figure it out” when they take on something a little out of the ordinary. We see construction business owners as confident and optimistic, which are wonderful traits to have as a leader. What we talk to our clients about is the need to marry that spirit with sound business practices that are tested regularly to ensure the organization is poised to excel.
Every company has opportunities to evolve thoughtfully as an organization; to take on exciting work; to grow and develop an engaged workforce; and to prosper financially as a company, as an ownership group and as individuals. By taking an objective approach to job selection and adhering to established internal controls during execution, the likelihood of success in the long term is considerably higher. We encourage contractors to utilize all the tools, methods and resources available in the market to make this happen for their organizations.
