Owners Shift More Financial Risk as Recovery Remains Sluggish
Burdened by a sluggish economic recovery, cash-strapped public and private owners are shifting greater risk onto contractors through onerous deal terms with non-traditional project responsibilities.
Contractors, as a result, must be alert to new risks, resist them whenever possible and keep costs low to stay profitable.
That was the consensus of presenters during the AGC/CFMA Construction Financial Management Conference, which took place Oct. 23-25 in Las Vegas.
The financial consequences of the risk-shifting are hitting subcontractors first since “they are furthest from the cash flow,” says Teresa Martin, vice president of Lockton Cos. LLC, Kansas City. The subs borrow more as costs rise and payments drag out, she said.
For several years, brokers have said that gradually increasing but not yet alarming surety loss ratios may mask differences based on size and market share. Top sureties with large, reliable clients and the majority of the bonded contract value report significantly lower loss ratios than smaller sureties with more small general and specialty contractor clients.
At the same time overall losses are manageable but creeping higher, sureties are unable to increase premium.
“Surety rates are down as new players join the fray and dilute prices with added capacity, helping drive profitability down 50% through June 2013” compared to the prior year, says Rick Ciullo, chief operating officer of Chubb Surety, Warren, N.J.
Meanwhile, greater reliance on technology and increased collaboration, including public private partnerships and design-build, are “clouding how insurers respond to claims,” says Danette Jones, senior vice president, Marsh Inc., Los Angeles.
The volume of teaming projects nearly tripled between 2005 and 2011, with103 jobs in excess of $1 billion in 2011 up from none six years prior.
“We’re seeing larger, more complex project that require collaboration and communication,” says Brian Perlberg, executive director, ConsensusDocs, Alexandria, Va.