Michael P. Cifone Senior Vice President, Surety Underwriting Hudson Insurance Group
On a daily basis, construction companies are confronted with risks associated with their labor force, subcontractors, contract terms, weather and unforeseen conditions. The ideal surety candidate has the ability to identify risks and manage them effectively. Once a risk is identified, the contractor has the option to avoid, eliminate, reduce or accept it.
The surety understands the risks surrounding the construction industry. When contractors are looking for surety support, they should demonstrate their knowledge of the risks and their plan to manage these risks. A long-range plan provides a good starting point for the contractor to address issues related to growth initiatives, succession planning, training and mentoring, and equipment and financing needs.
The daily risks associated with onerous contract terms, labor shortages, subcontractor defaults and equipment failures are best mitigated by a contractor with the proper management team operating with a practical long-range plan. Henry W. Nozko, Jr. President, Surety Underwriting ACSTAR Insurance Company
Unforeseen project conditions can blow up a project’s cost. Estimating errors and omissions in drawings and contract documents could lead to cost overruns. Natural disasters and defective materials or equipment can crush the success of a project. Labor stoppages from work disputes or jurisdictional disputes can eradicate estimated profits. Funding shortfalls and litigious owners could kill a project. It is impossible for a contractor to control all of these factors; however, through risk mitigation, successful outcomes are greatly enhanced.
Vigorously renegotiate onerous contract terms and conditions. Secure insurance coverage for a particular project exposure in addition to simply purchasing required insurance. Confirm that adequate project financing has been secured. Negotiate extensions to labor agreements where the absence of such could give rise to work stoppages. Require bonds from critical subcontractors and suppliers. Research the litigation history of your customers.
Mike Sanders Senior Vice President, Underwriting Old Republic Surety Company
The individual a contractor selects as its agent for surety bonds has a tremendous impact on the contractor’s ability to obtain the most beneficial surety bonding program possible. Look for a bond agent who:
An agent demonstrating these traits will be most effective in presenting a contractor to a surety underwriter in the most favorable manner.
Bogda M. Clarke Associate Vice President, Surety Claims Nationwide
Heightened risks from onerous contract provisions pose a threat to subcontractors from project delays wholly unrelated to their work. If the subcontractor has agreed to broad language obligating it to meet the project schedule as it may be revised and updated, coupled with “no damage for delay” language and clauses allowing the general contractor to supplement the subcontractor’s workforce, the subcontractor’s risks may skyrocket.
A general contractor that has fallen behind in its work may seek to avoid its own liquidated damages exposure through contract provisions allowing for schedule compression and acceleration, causing inefficiencies to subcontractors and back-charge exposure to the subcontractor. Consequential damage exposure, without limitation in the subcontract, also may be unreasonably high.
Subcontractors must not agree to clauses that unfairly expose their companies to ruinous consequences for project delays and disruptions for which they may not have been responsible. Brian Smith Contract Underwriting Officer Liberty Mutual Surety
Contract provisions important to a contractor’s risk assessment include liquidated/consequential damagers, default, payment terms, change orders, no damage for delay, final payment, warranties and hold harmless/indemnity. Key questions include:
Steve Dorenkamp Vice President, Claims Manager Merchants Bonding Company
Our advice is: Always read your contract and, where appropriate, seek the input of your surety to help you avoid onerous bond language. Here’s a quick list of clauses to be aware of:
In each of these cases, the goal is to limit the risk to what a contractor and its surety should truly be responsible for and not force them to take on unnecessary risks. Your professional surety agent and surety underwriter should be able to assist you with identifying onerous contract language, allowing you to modify it and right-size your risk.
Carl G. Castellano Vice President, Contract Surety Philadelphia Insurance Companies
Cardinal rule No. 1: Read the contract and associated documents. Clauses, such as those outlined below, will be favorable for one party but not favorable for others. Beware of:
Robert E. Shaw President Skillings Shaw & Associates
The first meeting is about the bond producer and contractor learning more about each other’s goals, businesses and history, as well as identifying steps to meet the contractor’s business surety goals.
Bring all information, statements and reports, such as financial statements, résumés of key employees, trade references, recommendations and other pertinent documents requested by the bond producer.
The producer will explain for whom he or she works, how surety companies underwrite bonds, how bond rates work, how to request a bond, the importance of a good accountant, why bond underwriters care about construction accounting and bank support, the general surety marketplace, and how producers can coach contractors to attain higher levels of surety capacity.
He or she will explain how bonds are underwritten based on character (of the contractor), capacity (the expertise and experience of a contractor to handle a project) and capital (the financial strength of the contractor and its indemnitors).
Michael C. Zisa Partner Peckar & Abramson
When a contractor selects a law firm to defend or prosecute a claim against a performance or payment bond, it is essential to select a firm that not only understands the complexities of construction law but also has a true understanding of the legal and practical issues affecting sureties.
I regularly see well-seasoned construction lawyers who miss significant opportunities for their clients because they do not understand or appreciate the intricacies of surety law.
They do not understand the terms of the performance or payment bond and how those terms impact the contractor’s and surety’s right and obligations, which can result in costly consequences.
Richard Barnett Senior Vice President, Surety Director Chubb Insurance
Investing in people remains a top priority. Contractors should make sure they are working with a seasoned surety that is not only deep in talent, but also consistently hires and trains new entrants.
Similarly, contracts and bond forms are getting more complex, particularly for large or privately financed projects. These require experienced and responsive legal resources to identify the inherent risks and potential solutions.
The surety industry is not immune to the need to improve efficiencies through technology. Best-in-class sureties are regularly investing in their platforms to enhance real-time access to information and timely decision-making.
With a growing and changing market, face-to-face interaction is as important as ever. A surety needs to be available to its clients to clearly understand their needs as well as their strategy to address risk.
Finally, there is no substitute for working hard and smart. Demands are great on contractors, requiring heavy investments of time and pursuit costs.
Michael Groman Vice President, International CNA Surety
On a pure capacity point of view, the availability of capital has been robust given the continued run of excellent industry results. Many established sureties have continued to leverage more of their own internal capital, and that of the reinsurers, by taking higher net retentions and placing higher excess of loss limits on top, translating into higher program capacity. Some sureties have adapted to the growth challenges by flattening their organizational oversight and moving more authority to the field.
Alternative surety solutions, such as expedited dispute resolution clauses and partial liquidity bonds, have grown in usage as contractors and sureties strive to meet the requirements of owners and lenders in the new public-private partnership models.
Lastly, more established sureties are going above and beyond the extension of surety credit by providing legal review to help avoid onerous contract terms, providing benchmarking tools for clients, and sharing their claims team insights on best practices.
Brad Gibson Vice President, Surety Marsh & McLennan Agency
The surety industry as a whole managed to weather the recession fairly well and losses fell significantly short of expectations. The profitability of the product has paved the way for an influx of capital and resources into the industry, which has made it possible for existing sureties to increase capacity.
Surety capacity is readily available from sureties, often at multiples of what they could accommodate just a few years ago.
Smaller sureties that cannot compete on large bond programs have adapted by offering up “bonded only” programs. A strong construction market yielding better profit margins has allowed sureties to extend more credit than they once would for a given balance sheet.
Underwriters are becoming more adept to get past the numbers to underwrite individual projects that create a stretch. Overall, an unprecedented amount of surety capacity is available to accommodate the growing demand. An open and proactive approach to communication with your surety is the key to accessing it.
Michael Bomba Director & Counsel, Contract Documents & Risk Management AIA Contract Documents
A payment bond is separate from the contractor’s agreement for the project and it often includes separate obligations the contractor must satisfy when a contractor is considering making a claim. Accordingly, a contractor should be aware of the terms of the bond at the outset of the project and thereafter be careful to ensure that it satisfies all the conditions in the bond. A failure to meet all the required conditions could result in the surety not being obligated to make a payment.
Particular attention should be given to the bond’s notice requirements. If a contractor fails to provide notice to the surety of a claim on the bond within the time period required, the contractor could lose its right to payment.
Additionally, many payment bonds require the contractor to provide adequate supporting information in order for the surety to consider the claim as proper. Failure to do so also could put the contractor’s claim at risk, or at the very least delay any payment being made by surety.
Michael A. Marra Vice President, Construction Division American Arbitration Association
Construction firms and their lawyers carefully evaluate the business terms in their contracts, but they often reflexively insert a boilerplate arbitration clause. This oversight may jeopardize the inherent benefits of arbitration and could result in a more expensive, disruptive and inefficient proceeding.
Arbitration is a creature of contract, enabling the parties to tailor the process to fit their needs and bypass litigation procedures. If you do not take advantage of this critical distinction, you may be relegated to a more cumbersome and costly proceeding.
It is vital to give upfront consideration to the details of the procedures most suitable to any likely disputes under a contract and not simply hope for the best once hostilities have arisen. Parties to a contract should evaluate their specific project and potential disputes to determine if a simple arbitration clause found in most industry form documents is sufficient for their project or if further customization is needed.
Jack Callahan Partner - Construction Industry Leader CohnReznick
The new revenue recognition standard is now due for implementation. Despite the long lead time and delays, we find the construction industry is generally not ready.
Construction CFOs must have their game plan in place or risk the consequences of last-minute issues that may be costly, time-consuming and will pull much-needed resources from other areas within their organization.
As you prepare for this year’s financial statement audit, meet with your accountants to discuss the five-step process that needs to be put in place. It’s important to be certain that you are in a position to gather the information needed to make legal, accounting and engineering judgements required to properly support your financial statement assumptions.
Review your accounting software systems to assure that you have the capabilities to assemble the required financial information. Have you addressed key issues, including software, job tracking, contract analysis, point-in-time testing and others?
Written by {{author.AuthorName}} - {{author.AuthorPosition}}, {{author.Company}} {{author.Company}} Contact Info: {{author.OfficePhone}} , {{author.EmailAddress}}
{{comment.Text}}