Where’s the Beef?

by James P. Schabarum II, Principal, Executive Vice Principal
Boom to bust went technology, real estate, and now the construction market.  Hunting down and executing profitable work in the next few years will be critical to the survival of most contractors.Surety losses are expected to increase in the remainder of 2012 and in 2013: since a downturn in construction activity means more bidders fighting for fewer jobs yielding lower profit margins.  Primary factors affecting the overall state of the surety industry will be:

  • Access to Capital
  • Economic / Political Climate
  • Sureties’ Performance
  • Finding “The Beef”

Construction is cyclical and contractors should prepare for the pent-up demand that will build during a recession.  While contractors must retrench during lean times, they also need to protect their core resources and be ready to bid work when the economy rebounds.  Contractors should be vigilant on:

  • Conserving capital and staying liquid.  “Cash is King!”
  • Aggressively billing and collecting and minimizing underbillings and retentions.
  • Procuring materials and locking in prices whenever possible.
  • Having the right size bank line of credit available to support the company’s business plan.  Have a backup bank lined up in the event the primary bank reduces or does not renew the credit line, or becomes financially unstable.
  • Not “buying” a job to keep employees busy; rather, adjusting overhead and maintaining profit margins.  Bidding the job, not the competition.
  • Bonding subcontractors.  Requiring bonds on subs is an effective way for contractors to manage risk.  Follow your subcontractor bonding policies, especially in today’s economic climate.  Subs should be bonded when they represent a key trade to the project, or a significant portion of the work, they are the sole source for anything, or when the contractor is unfamiliar with the subcontractor.
  • Qualifying the sureties they receive subcontract bonds from.
  • Doing what they do best. “Sticking to Your Knitting.”
  • Understanding your contract and requiring effective and equitable terms.
  • Reading the bond forms and watching for onerous language.
  • Protecting their top talent who will manage projects well no matter what the market conditions are will be essential when the economy recovers.
  • If choosing to team up on a project, selecting and structuring their partnerships carefully. It’s easy to get married and costly to get divorced!
  • Working with a construction-oriented CPA, banker, and attorney.

The bottom line is that sureties want more than a contractor that can build a project.  They want a sound business partner that is rational, committed, honest, and knows how to run a successful construction company.  In other words, they want a company that will continue to grow and be profitable.

For the full article on Surety Outlook, click here.