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SURETYB O N D I N G

Construction

EXECUTIVE

T H E M A G A Z I N E F O R T H E B U S I N E S S O F C O N S T R U C T I O NT H E M A G A Z I N E F O R T H E B U S I N E S S O F C O N S T R U C T I O N

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November 2004 Surety Bonding Construct ion EXECUTIVE | S3

S4 Excelling in Today’s SuretyBond MarketBy Jason Huntsman

S10 Executive Insights—HowCan Contractors Best AdaptTo Today’s Surety Market?By Jason Huntsman

S16 Have Contract SuretyQuestions? SIO Has The AnswersBy Marla McIntyre

S18 The Big Picture: Surety IsMore Than a Line of CreditBy Matthew Rosenberg

S22 Communication & Surety ClaimsBy Timothy Mikolajewski

S24 Components of aSuccessful SuretyRelationship—TestBy Michael Dougherty

S26 Bonding Joint VenturesBy William Cheatham

S28 The Surety Bond Producer:A Contractor’s Link To Bonding SuccessBy Craig E. Hansen

S32 The “Three Cs” OfSurety… Then And NowBy Mike Anderson

S38 The Current InsuranceClimate for ContractorsBy Kent Thomas, CPA

S42 Risk ManagementBy Bryan C. Jackson

S46 Contact Page

Associations

Surety Information Office (SIO)5225 Wisconsin Avenue N.W., Suite 600

Washington, D.C.20015-2014(202) 686-7463(202) 686-3656, [email protected]

SIO is the information source on con-tract surety bonds in public and privateconstruction.

The Surety Association of America(SAA)1101 Connecticut Avenue N.W., Suite 800Washington, D.C. 20036

(202) 463-0600(202) 463-0606, [email protected] represents

more than 500 companies that collec-tively underwrite the vast majority ofsurety and fidelity bonds in the UnitedStates, as well as a number of foreignaffiliates.

National Association of Surety BondProducers (NASBP)5225 Wisconsin Avenue N.W., Suite 600Washington, D.C. 20015-2014

(202) 686-3700(202) 686-3656, [email protected] representsmore than 5,000

personnel who specialize in suretybonding; provide performance andpayment bonds for the constructionindustry; and issue other types of sure-ty bonds, such as license and permitbonds, for guaranteeing performance.

E D I T O R - I N - C H I E F

Lisa A. Nardone

S E N I O R W R I T E R

Jennifer Spillane

S T A F F W R I T E R

Lauren Pinch

C O N T R I B U T I N G E D I T O R S

Marla McIntyreSurety Information Office

Jason HuntsmanSurety Information Office

D E S I G N A N D P R O D U C T I O N

The Magazine Group

A D V E R T I S I N G I N F O R M A T I O N

Donald R. Berry(908) 852-7466 [email protected]

Stephen B. Donohue(609) 654-4568 [email protected]

Surety Bonding November 2004, a specialsection of Construction Executive, publishedby Associated Builders and Contractors. © Copyright 2004. All rights reserved.

CONTENTSTABLEOF

[ S U R E T Y B O N D I N G ]

S4 | Construct ion EXECUTIVE Surety Bonding November 2004


T

EXCELLINGINTODAY’S

SURETY BOND MARKETB Y JA S O N H U N T S M A N

Times and the surety market havechanged. But how do these changes affectcontractors? The nation’s top surety pro-fessionals talk about the state of the sure-ty industry and offer advice to contractorson what to expect and how to thrive intoday’s market.

HOW DID WE GET HERE?While the surety industry has gonethrough a number of changes in recentyears, numerous signs indicate that sta-bility is returning to the market. However,today’s market does have many uniquefeatures, which savvy contractors need tounderstand fully in order to gain a com-petitive advantage.

The surety industry faced a number oflarge losses beginning in 2001, and whilecommercial surety was especially hard hit,contract surety also experienced substan-tial losses. Surety companies, like anyother businesses, need to remain prof-itable; as such, the industry has had toreevaluate risks, contend with mergersand adjust pricing structures. Reinsurancecompanies, which take on a good deal ofrisk on behalf of sureties, also have had aneffect on the industry as they renegotiatetheir reinsurance treaties.

William E. Cheatham, president ofZurich North America Surety, explainshow the surety market changed in recentyears.

“Two years ago the surety industry wasdivided along the lines of national orregional companies. Due to changes and

mergers, that line has shifted to servinglarge, middle or small-sized contractingfirms. A few companies are now vying forthe large-sized accounts, while the rest ofthe industry is focused on the middle andsmall market.”

Reinsurers’ appetite and ability to helpsurety companies manage risk are impor-tant factors that can affect contractors thatreceive surety credit.

According to James E. Lee, presidentof Old Republic Surety Company andchair of the board of directors of TheSurety Association of America, “Therewas some concern as to how much rein-surance capacity would be available tosureties. Thankfully, the void left by rein-surers that have merged or left the mar-ket has been partially filled, which in turnhas enhanced capacity.”

AVAILABILITY OF BONDSSo, is there enough capacity to go around?The answer is yes for qualified and capa-ble firms.

According to Michael Cusack, seniorvice president and regional surety directorwith Aon Construction Services Group,“Due to the contraction of the reinsur-ance market, capacity is still an issue forlarge contractors that need surety pro-grams in excess of $250 million. Themajority of contractors that have largerwork programs will require the support oftwo or more sureties in the form of a co-surety facility.”

While mega-contractors may contend

with co-surety arrangements, middle andsmall-sized firms will most likely be unaf-fected by capacity issues.

Mike Peters, president of SafecoSurety, elaborates, “There does appear tobe good competition and sufficient capac-ity available for contractors in both ofthese segments [middle and small-sizedfirms]. So, for the most part, successful,established contractors should not seecapacity issues. Likewise, there will con-tinue to be capacity available to theemerging and small contractor markets,but with more stringent underwritingstandards as loss frequency in this marketwill continue to be a concern.”

Geoffrey Haver, senior vice presidentand construction practice leader withRiggs, Counselman, Michaels & Downes,an Assurex Global Partner, adds, “There isplenty of capacity for small and mid-sizedcontractors. Minority contractors also haveprograms available from the SmallBusiness Administration, local initiatives,and the Surety Association of America tostrengthen business practices that worktoward establishing a bonding program.”

PREQUALIFICATION NEEDSMore than ever, sureties need accurate andtimely information from contractors inorder to manage individual bonding pro-grams. This financial information is notsought for the sake of wanting morepaperwork; it is vital for sureties to devel-op a solid, well-rounded understanding ofa contractor’s complete business operation.

November 2004 Surety Bonding Construct ion EXECUTIVE | S5

Aon’s Cusack explains, “In response tothe industry’s poor results of the past fiveyears, the implementation of higherunderwriting standards was well under-way prior to the start of 2004. These stan-dards mandate that contractors committo putting more capital at risk, retain prof-its, manage their business based on morerestrictive work programs and provide thesurety with a consistent flow of high-qual-ity information.”

So, what does the surety really want?Accurate, timely and clear information arethemes echoed throughout the industry.Sureties need this information to developa deeper understanding of a contractor’smanagement team, finances, operationsand risk-management strategies.

According to Henry Nozko, Jr., presi-dent of ACSTAR Surety, “Contractorsreally should submit financial statementsquarterly rather than yearly. Accuratework-in-progress forms are also neces-sary. It is important that all informationsubmitted to the surety be presented in alegible, easy-to-access manner. Because

the volume of paperwork is being handledby fewer surety companies, high-quality,easy-to-understand presentations areessential.”

Craig Hansen, senior vice presidentwith Holmes Murphy & Associates, Inc.and president of the National Associationof Surety Bond Producers, agrees. “Thequality and frequency of underwritinginformation continues to remain a key to acontractor’s success in maximizing the sup-port of their surety underwriter. The sure-ty’s understanding of the contractor’s busi-ness plan is critical to the suretyrelationship. Working with a professionalsurety bond producer will enhance a con-tractor’s understanding of current marketconditions, and will provide guidance incommunicating a contractor’s businessplan to the surety underwriter,” he adds.

The emerging and small contractingfirm seeking to start a bonding programmay be placed under more scrutiny thanan established contractor. However, stepscan be taken to make such a business moreattractive to a surety.

According to Phil Tobey, vice presidentof surety with The Dale Group, “For smalland emerging contractors seeking their firstbond, a three-pronged approach is best.First, they should capitalize their businessas best as they can. It’s important to have asmuch money invested in the company aspossible and have it documented by a CPA.Second, prepare and provide a resumé thatcontains detailed project experience. A con-tractor who has only done $200,000 proj-ects should not expect to move right intohalf million-dollar projects without theprior experience.Third, don’t be too aggres-sive. Look to build a relationship with asurety and don’t expect unrealistic amountsof credit to be extended.”

Dennis Perler, president of LibertyMutual Surety, suggests that the emerg-ing or small contractor who is seeking tomove into public-bid projects do so witha balanced, steady approach. It is worth-while to maintain some private work andnot jump headfirst into the public arena,which has a unique set of demands andfeatures that a private-construction firmmay be unprepared to manage.

THE SURETY RELATIONSHIPHaving a solid surety relationship is impor-tant during normal conditions, and invalu-able during times of uncertainty andchange. Open, honest and frequent com-munication among the contractor, suretybond producer and surety underwriter helpsensure this relationship remains healthy.

“The surety relationship should betreated similarly to other credit relation-ships. A solid working relationship with asurety company enhances many firms’ability to penetrate markets that fit theirstrategic plans. Understanding thestrengths and limitations of your surety isalso important because many surety com-panies target specific types and sizes ofbusinesses; it is best that your risk profileis in line with the appetite of the surety,”says John Welch, president and chief exec-utive officer of CNA Surety.

Sureties, like other businesses thatextend credit, have a vested interest in see-ing their clients succeed. Because a suretyis vouching for a contractor’s performance

and backing that up with its financialresources, it is imperative that a surety hasa clear picture of the principal’s company.By regularly communicating with thesurety team, contractors can help create asolid business partner for the long haul.

PREMIUMSRealistically, surety remains an extremelylow-priced risk management tool for the100 percent payment and 100 percentperformance protection afforded to anobligee. While many indicate that premi-ums have stabilized for middle- andsmall-sized contractors, sureties may con-tinue to adjust pricing for more risk-intensive, large-scale accounts.

Terrence Cavanaugh, chief operatingofficer with Chubb Surety indicates,“With premiums, there is more of a focuson the risk of the individual project andcontractor being taken into consideration.A project that will last four years wouldbe priced differently than one that isscheduled to take one year to complete.Projects that last beyond two years gener-ally have more risk associated with themand will be priced accordingly.”

Zurich’s Cheatham agrees, “Premiumshave leveled off since the pricing restruc-turing of the past couple of years. However,accounts with high capacity or high-creditrisk exposure may have to contend withhigher rates. Not all surety companies haveimposed realistic rates, but it is importantthat companies make the surety line attrac-tive to reinsurers and their shareholders.”

CLAIMSThe word on the street about claims activ-ity is mixed. Some see the more stringentunderwriting conditions of the past fewyears as having a positive effect on claims,

while others report that the frequency ofclaims remains a concern.

While surety bonds typically areunderwritten under a zero-loss model,unfortunately claims do occur.

William Marino, chairman and chiefexecutive officer with Allied NorthAmerica, offers insights into today’sclaims activity, “The effects of today’sback-to-basics underwriting standardswon’t be realized in the immediate future.While the economy is an important fac-tor on the frequency and severity ofclaims, the standards employed in the midto late 1990s are also still having an effect.The frequency and severity of today’sclaims are due in large part to the morerelaxed underwriting standards of thepast, not because of today’s practices.There is a lag between more thoroughunderwriting standards and a reductionof claims,” Marino says.

Writers of SuretyThe latter part of the 1990s and the early part of this decade have been a time for change in the surety industry. A number of companies have consolidated ordeparted from writing the surety line. Looking at the top 10 writers of surety in 2003 compared to 1998 demonstrates how different the industry looks today than it did five years ago. Some of the players may have changed; however,enough surety capacity remains to support the U.S. construction needs.

Top10 Writers of Surety in the United States—20031. Travelers Property Casualty Corp.2. The St. Paul Companies 3. CNA Insurance Companies 4. Zurich Group5. Safeco Insurance Companies6. Chubb Group of Insurance Cos. 7. Liberty Mutual Group 8. The Hartford Insurance Group 9. HICA Holding Group

10. American International Group © The Surety Association of America, “Fifty Largest Writers of Surety—United States,” August 17, 2004.Additional detailed statistical reports are available for purchase at www.surety.org.

Top10 Writers of Surety in the United States—19981. The St. Paul Companies 2. CNA Surety Corporation3. Reliance Insurance Companies4. Fidelity & Deposit Group5. Travelers Property Casualty Corp.6. American International Group 7. Safeco Insurance Companies 8. Fireman’s Fund Insurance Cos. 9. Amwest Insurance Group

10. Frontier Insurance Group, Inc. © The Surety Association of America, “Fifty Largest Writers of Surety—United States,” 1998.Additional detailed statistical reports are available for purchase at www.surety.org.



“PREMIUMS HAVE LEVELED OFF

SINCE THE PRICING RESTRUCTURINGOF THE

PAST COUPLE OF YEARS.HOWEVER,ACCOUNTS WITH HIGH CAPACITY

OR HIGH-CREDIT RISK EXPOSURE MAY HAVE TO CONTEND

WITH HIGHER RATES.”


According to Safeco’s Peters, “Theredoes appear to be more frequency prob-lems than severity problems. Probably thelargest trend we’ve seen with contractorsgoing into a claim is over-expansion eitherin their work program or in their territo-ry. Usually this was ‘promoted’ by severalyears of successful operating results, butsomewhat stagnant top-line growth.Obviously growth at the expense of con-trol does not work.”

While claims are an unfortunate situa-tion, contractors can take steps in today’smarket to mitigate loss or even prevent adispute resulting in an actual claim.

“Construction is a tough business—period. Disputes will happen even to themost solid contractor. However, contrac-tors need to keep thorough documenta-tion and be prepared to share it with theirsurety when problems arise on a project.Contractors must provide documentationand engage in frequent correspondencewith their surety in order to defend theirposition. A contractor that ignores thesurety’s calls may be put under more scruti-ny,” The Dale Group’s Tobey says.

An Assurex Global Partner, Riggs,Counselman, Michaels & Downes’ Haveroffers further advice for supporting contrac-tors’ positions and avoiding problematic sit-uations: “Having written documentation isessential for a contractor’s position to be pre-served. All change orders should be in writ-ing and signed-off by only those who havepre-approved authority. Contractors shouldenter into standard contract documents suchas AIA’s and must develop a thorough

understanding of any manuscript contract.It’s also important to know who you areworking for and who’s working for you. Badreputations—both of owners and otherspotentially working on a project—shouldbe seriously taken into consideration.”

LOOKING AHEADEventually the surety market will intro-duce new players, bringing with it addi-tional capacity and the potential for a soft-ening market. However, many predict thiswill occur slowly and also foresee today’smarket conditions and solid underwritingpractices remaining in effect for severalyears to come.

The near future of the surety industrywill be met with a cautious optimism.While the industry incurred nearly $1.3billion in contract surety claims in 2003,according to the Surety Association ofAmerica, many foresee the possibility ofmoderate profitability within the nextfew years.

The short-term outlook for the suretyindustry has a great deal to do with theunpredictable nature of the overall econ-omy. While the construction market hasshown strong growth in 2004, the effectsof rising prices for gasoline, steel, concreteand other construction-related commodi-ties remain important factors for long-term growth. If economic conditionsdecline for contractors, the domino effecton claims may negatively affect the suretyindustry’s bottom line.

For the near term, construction isstrong—according to the U.S. Census

Bureau, during the first seven months of2004, non-residential construction spend-ing amounted to $451.5 billion—5 per-cent above the $430.1 billion for the sameperiod in 2003.

“Although there has been more of afocus on solid underwriting standards,economic uncertainties are an area forserious concern. Issues such as inflation, alack of government funding for publicworks and scarcity of construction mate-rials may coalesce to create a more hostileconstruction environment than was inplace two to three years ago.This is some-thing that may cause problems this yearand next,” Chubb’s Cavanaugh says.

Michael F. Greer, vice president ofsurety and fidelity with Penn NationalInsurance, offers a candid view on the out-look for the industry. “The surety indus-try is currently in the reality stage. Lossesin the past couple of years have been fre-quent and severe, and there are fewersureties than there used to be.

“We hope sureties follow the sameadvice that they give to their clients. Aconsistent, underwriting-based suretycompany is the one that will be around inboth good times and bad. The hot suretycompany that doesn’t ask questions andcompetes on giving away capacity is justlike that hot stock tip from the broker whocalls you out of the blue: it might work fora little while, but in the long run, you can’tretire with it,” Greer advises.

By reevaluating risks, returning tosolid underwriting traditions andemploying realistic pricing structures,surety companies are poised to help con-tractors succeed for the near and longterm. By relying on the advice from a pro-fessional surety bond producer andunderwriter, contractors have the oppor-tunity not only to survive in today’s mar-ket, but also to thrive.

Surety is about more than just receiv-ing a bond—it’s about helping contractorssucceed and excel—in any market.

Huntsman is communications manager for the

Surety Information Office (SIO). For more infor-

mation, contact SIO by email at [email protected],

call (202) 686-7463 or visit www.sio.org.


ISSUES SUCH AS INFLATION,A LACK OF GOVERNMENT FUNDING

FOR PUBLIC WORKS AND SCARCITY OF CONSTRUCTION

MATERIALS MAY COALESCE TO CREATE

A MORE HOSTILECONSTRUCTION ENVIRONMENT THAN WAS

IN PLACE TWO TO THREE YEARS AGO.”


Terence CavanaughCOOChubb SuretyTo succeed in today’s market, contractorsneed to align themselves with the best pos-sible advisors. Experienced construction-oriented CPAs, specialized surety bondproducers and insurance brokers, and anexpert legal team are all important exter-nal components for a successful contract-ing operation. A contractor should sharefinancial and operational records with hisor her surety on a regular, open basis. It isalso key for the surety to develop an in-depth understanding of the contractor’smanagement team and the company’soverall approach to risk management.

Mike PetersPresidentSafeco SuretyContractors can adapt to today’s suretymarket by making sure they have a solidrelationship with their surety and are deal-ing with a professional surety agent. Thatway, when issues come up they can be dis-cussed and hopefully resolved fairlyquickly. This is also a good time to focusoperations in areas where firms can con-sistently make money. Surety credit isvaluable, so “spend it” wisely. Small andemerging contractors should stay focusedon the core business or market they knowwell. Contractors should not get enam-ored with top-line growth unless they

have built their balance sheet to withstanda poor job. Also, they should invest in theproper controls to fully understand thestatus of projects at all times.

Craig E. HansenSenior Vice PresidentHolmes Murphy & Associates, Inc.President The National Association of Surety BondProducersIn today’s surety market, contractors arebeing asked to supply more detailed finan-cial statements on a more regular basis.Personal indemnity is much more likely tobe required, and continued pricing disci-pline will occur, especially at the upper-end of the market where capacity is theprimary concern of the contractor. In somecases, creative approaches to bonding willbe needed—especially on long-term ormega-projects. Contractors working witha professional surety bond producer havea close ally who is well-informed and pre-pared to help the business adapt to thesecurrent market features.

William E. CheathamPresident Zurich North America SuretyMost surety companies say they havereturned to a back-to-basics approach tounderwriting, which may mean to somenothing more than requiring accurate andtimely financial data. More important may

be emphasizing the need for a contractorto maintain a strong working capital andequity position. Lacking strong financialresources can leave a firm vulnerable. Intoday’s market, contractors should focuson raising profit margins on projects—there is too much general acceptance oftaking jobs at low profit margins. Also,contractors need to renew focus on accept-ing only reasonable contract terms andconditions. Accepting contracts that areonerous can lead contractors into peril. Animportant benefit of working with a sure-ty company is the expertise that it can pro-vide in a contract review—ensuring that acontractor’s best interests are preserved.

Geoffrey HaverSenior Vice President andConstruction Practice LeaderRiggs, Counselman, Michaels & Downes,An Assurex Global PartnerA contractor can do several things to bet-ter position the firm in today’s surety mar-ket. A contractor should: partner with aconstruction-oriented CPA, surety com-pany and producer; keep all partiesinformed with frequent communication(sureties do not like surprises); retain prof-it to strengthen the balance sheet; supplytimely and well-prepared financials; staywithin areas of expertise; be wary of jobsthat sound too good to be true; and con-tinually train and educate project man-agers and estimators.


EXECUTIVEINSIGHTS

HOW CAN CONTRACTORS BEST ADAPT

TO TODAY’S SURETY MARKET?

B Y JA S O N H U N T S M A N



John StanchinaVice PresidentRutherfoord Companies,An Assurex Global PartnerThe key for a new and emerging contrac-tor is to have a clear and concise businessplan, construction-experienced CPA, pro-fessional surety agent and legal profes-sionals. The other key is being reasonablewith growth objectives on projects andprograms in order to ensure systems andfinances can support operations. Thetemptation among emerging contractorsis to take every deal that comes down thepike—it is typically one of those projectsthat does not truly fit the firm’s abilitiesthat potentially puts the contractor at risk.

James E. LeePresidentOld Republic Surety CompanyChair of the Board of Directors The Surety Association of AmericaContractors should prepare their busi-nesses for even the worst of situations.By developing strategies to address diresituations, a business can potentiallycome through intact. The end of the cal-endar year is approaching and is an excel-lent time to prepare meaningful finan-cial statements that make sense to theuser. It is advisable for the contractor tosit down with the surety bond producerand CPA to develop strategies for adapt-ing to change. If a bonding program isterminated due to the departure of asurety or for another reason, are currentsolid financial statements ready if theneed calls for making a presentation toanother company?

Contractors should retain risk capitalin their businesses and pay bills on time.Prompt payment to laborers and materialsuppliers is imperative, regardless ofwhether the particular parties are coveredby a payment bond. Contractors alsoshould take advantage of discount oppor-tunities to save on material costs throughprompt payments. Having an establishedunsecured bank line of credit is importantnot only to be able to make such promptpayments, but is also extremely usefulshould a contractor encounter a cash drainwhile waiting for receivables.

John WelchPresident and CEOCNA SuretyUnderwriting in the surety industryremains disciplined. Surety companies arerequiring retention of profits in order togrow net worth and working capital.Sureties also continue to improve theirsecurity positions, requiring personalindemnity where deemed appropriate.Contractors should find a professionalbond agent and listen to his or her advice.There are fewer short cuts to gettingbonding than there were in the 1990s.Solid work experience coupled with a rea-sonable level of risk capital will allowentry into the bonding market.

Phil TobeyVice President of Surety The Dale GroupTo best adapt to today’s market, contrac-tors need to keep an open mind and beprepared to make changes. Contractorsshould align themselves with a profes-sional surety bond producer who workswith a variety of sureties that possess var-ious appetites for risk. The professionalagent should be a problem-solver andclose advisor. Sound advice from a suretyprofessional is essential.

Michael F. GreerVice President Surety and FidelityPenn National InsuranceA solid contractor will spend the moneyfor a construction-specific accounting and

estimating system. Knowing job statusfrom a profit standpoint is extremelyimportant to the contractor and to thesurety. Don’t grow beyond the company’scapability and don’t go get the big job andthen have to hire someone new to man-age it. Be willing to walk away from workthat doesn’t fit and make sure to knowwhere bids are going, whether to a gener-al contractor or a public owner. Don’t bethe latest victim of the general contractorlooking to pass off liability. Finally, readand fully understand all contracts beforesigning them.

Michael CusackSenior Vice President and RegionalSurety DirectorAon Construction Services GroupContractors should develop disciplinedlines of communication with the bondingagent and surety underwriters; communi-cate effectively on a more regular basiswith the surety provider; update the busi-ness plan throughout the year; avoid sur-prises by keeping underwriters updated onsignificant events; and make sure theunderwriter understands the current strat-egy and agrees with the contractor’s inter-mediate and long-term vision for theenterprise.

Contractors should be disciplined inthe use of surety credit. A prequalificationprocess should be implemented to ensurethat companies are deploying their bond-ing resources in areas that will generatethe greatest return for their organizations.

Michael MurphyVice PresidentBush, Cotton & ScottSureties are paying close attention to thedegree to which a contractor relies on hisor her bank of line of credit. If a firm con-stantly maximizes its line of credit, thenwarning flags may be raised. Sureties liketo see liquidity to be assured that a con-tractor can absorb problems.

Sureties also pay attention to the geo-graphic areas where contractors work andtheir areas of expertise. Basically, a contrac-tor would do well to stick to what it knowsbest. Whether switching from bidding on

A SOLID CONTRACTOR WILL SPEND THE

MONEY FOR A CONSTRUCTION-SPECIFIC

ACCOUNTING AND ESTIMATING SYSTEM.

KNOWING JOB STATUS

FROM A PROFITSTANDPOINT IS

EXTREMELY IMPORTANT TO THE CONTRACTOR

AND TO THE SURETY.

private jobs to public works, or moving intoa new geographic area, changes of thisnature raise sureties’ concerns.

William A. MarinoChairman and CEOAllied North AmericaThe expectations of sureties in today’smarketplace are very easy to understand.They expect a quality financial presenta-tion with sufficient levels of liquidity andloss-absorption power to meet the require-ments of the current construction climate;a focused business plan with careful evalu-ation of any deviations and an eye towardrisk management; and contracts enteredwith financially responsible parties withequitable contract terms and conditions.

Henry Nozko, Jr.PresidentACSTAR SuretyIt is important that a contractor select asolid surety company and stick with it,treating it the same as a banking relation-ship. Shopping around and moving fromsurety to surety is not a good idea. A sure-ty may feel more obligated to help a long-time client through a rough spot, whereasa contractor who bounces from surety tosurety may be looked on less favorably.Maintaining the surety relationship ismore important now than even a year ago.A contractor should carefully select asurety company and develop a sound rela-tionship. This is vitally important, espe-cially if all, or even a portion of a contrac-tor’s work, is in the public sector.

Mark ReaganChairman and CEOWillis Construction PracticeUnderwriting now focuses more on liq-uidity in a contractor’s business and avail-ability of capital at risk. For contractors,capital and earnings continue to drive theavailability of surety capacity up or downaccordingly.

While 10 years ago it was unusual fora sizeable account to have to post collat-eral, today it is not uncommon to ask forsuch and to have an inter-creditor lenderinvolved. As sureties are taking on morerisk, these steps ensure that they will have

a place at the table should things go wrongon a project.

For contractors, there is more complex-ity and leverage against success than at anytime in the past two decades.The good andgreat contractors will thrive,while the aver-age and mediocre will find their survivalthreatened. As active players in the con-struction process, sureties see these riskdrivers and continue to take a cautious viewon all but the very strongest accounts.

Michael D. WilliamsPresidentNorth American Construction Services, Inc.With the return to solid underwriting andthe focus on working capital and networth as well as the CPA reportingrequirements, there are a number of capa-ble entities facing challenges in receivingsurety credit. One solution to the prob-lem is funds control/escrow. This toolhelps the contractor to meet the require-ments of working capital and net worthby the surety requesting that a funds dis-bursement agreement be set up to moni-tor the project. Funds control alone is notthe answer but flexibility of the tool is.

A surety can require working capitaldeposits into the escrow account that willassure the surety that funds are availableto start and finish the project. An addi-tional condition of injecting other fundsinto the escrow account that are held sim-ilarly to collateral tends to solve the networth problem. The funds come from thepersonal liquidity or net worth that hasbeen drawn out of the company and con-

verted to hard personal assets. More andmore contractors are seeking this solution,and obligees are delighted to have a thirdparty adding comfort to the disbursementof the contract proceeds.

Stephen PateSenior Vice PresidentHCC Surety GroupSmall contractors would do well by devel-oping a truly clear-cut, consistent andcredible set of financial statements. Theseshould be shared with the surety not juston an annual basis, but also periodicallythroughout the year. In today’s market, ifa presentation does not conform to a sure-ty’s particular standards it may not receivefavorable attention. With the help of aconstruction-experienced CPA, smallcontractors can develop a footprint ofconsistent, analyzable financials from yearto year, whether they conform to audit,review or compilation standards.

The small contractor should pay closeattention not only to business payments,but personal credit management as well.Because sureties are more likely to scruti-nize personal financials of smaller firms,it is important to maintain a sound per-sonal credit history.

Dennis PerlerPresident Liberty Mutual SuretyThis is an exciting time for the suretyindustry. The nation’s aging and expand-ing infrastructure needs will continue tokeep good public works contractors inhigh demand. Moreover, as the economycontinues to improve, there should beincreased public funding to rebuild roads,schools and other public works. Whileemerging from three difficult underwrit-ing years, the surety industry today isready to serve the nation’s contractors.Most sureties recognize that stable andresponsible underwriting is critical tomaintaining long-term capacity and cus-tomer confidence.

Huntsman is communications manager for the

Surety Information Office (SIO). For more infor-

mation, contact SIO by email at [email protected],

call (202) 686-7463 or visit www.sio.org.



IT IS IMPORTANT THAT A CONTRACTOR

SELECT A SOLID SURETY COMPANY

ANDSTICKWITH IT,

TREATING IT THE SAME AS A

BANKING RELATIONSHIP.

W


While contract surety bonds are an impor-tant component of a contractor’s overallbusiness operations, they are not exactlysomething learned in grade school. Theunderlying concept behind contract suretymay be fairly simple, but there certainly isplenty of room for questions on the details.

That’s why the Surety InformationOffice (SIO) was created—to answercontractors’ and owners’ questions, pro-vide useful, practical information on allthings contract surety and promote theuse of surety bonds in public and privateconstruction.

Established in 1993 by the SuretyAssociation of America and the NationalAssociation of Surety Bond Producers,SIO offers a wide assortment of materialsfor contractors and subcontractors rang-ing from electronic resources to printedbrochures and informational booklets—all available at no cost.

21ST CENTURY TOOLSSIO’s newest resource isan interactive CD-ROM,“Surety Bonds: A Guidefor Contractors,” whichmakes learning about con-

tract surety bonds easier than ever. Createdwith Macromedia Flash software, the CDhas many layers of interactivity and usercontrol, as well as access to SIO’s onlinecontractor resources and links to usefulwebsites. The disc contains three audio-narrated presentations, which cover thebonding process, the surety relationship andsubcontractor bonding. Best of all, the pre-sentations can be accessed from a comput-er at any time and surety bonding informa-tion can be absorbed at the user’s pace.

PRINT PUBLICATIONSOne of the many free publications available

to contractors, “How toObtain Surety Bonds,”serves as an excellent ref-erence guide on the bond-ing process. This publica-tion is ideal for any contractor venturingout in the world of surety for the first time,or those wanting a quick refresher for a staffmember.

Another print resource created specifi-cally with contractors in mind is “SBA’sSurety Bond Guarantee Program,” whichdetails the U.S. Small Business Admini-stration’s program that helps small andemerging contactors that may not qualifyfor bonding through regular commercialchannels to obtain bonds.

Other print materials address topicssuch as the importance of surety bonds;avoiding a construction business failure;electronic bonding; evaluating surety com-panies; and comparisons to other riskmanagement products.

ONLINE ACCESSThe SIO website, www.sio.org, is anotherimportant resource available to contrac-tors at any time of the day or night. Thesite contains an area dedicated especiallyto issues affecting contractors and subcon-tractors and offers specific information ona wide variety of topics.

The extensive FAQ portion ofthe site provides answers and sup-plemental information to ques-tions such as:•Where can I find contract doc-

uments and standardized bond forms? • What is the Treasury List or T-list and

how can I get a copy? • Where can I get surety industry statistics? • Is it possible to file a bond electronically? • How can emerging or minority con-

tractors get bonds? • Where can I get information on sub-

contractor bonding?

INFORMATION CENTRALSIO is the resource on contract surety bondsand is available to provide a wealth of infor-mation on this valuable business tool. Takeadvantage of SIO’s numerous free resourcesand industry insights. By developing anunderstanding of the bonding process, con-tractors can better position their businessesin a competitive marketplace.

McIntyre is the executive director of the

Surety Information Office (SIO) in Wash-

ington, D.C. For more information, contact

McIntyre at [email protected] or contact

SIO by email at [email protected], call (202) 686-

7463 or visit www.sio.org.

To order any of SIO’s free materials,visit www.sio.org, click on the “FreeBrochures and CDs” button, then beginselecting the brochures, kits and CDs.Once you find the publication youneed, enter a quantity, click “add tocart,” complete the order form, andmaterials will be shipped within 48hours. Materials also can be ordered bytelephone (202) 686-7463, fax (202)686-3656 or email [email protected].

HAVE CONTRACT SURETY QUESTIONS?

SIO HAS THE ANSWERSB Y M A R L A M c I N T Y R E


C



Construction is an inherently risky busi-ness. Each year, thousands of contractorsfail, leaving billions of dollars of uncom-pleted projects. Of those contractors thatgo out of business, statistics show thattwo-thirds have been in business for morethan six years, while one-third have beenin business for more than 10 years.

Serious problems arise when theseconstruction projects are not protected bysurety bonds. While most public projectsare bonded, and taxpayers are protectedby the security of a bonding company, onlya smaller percentage of private projectsare bonded, despite the tremendous ben-efits afforded by bonds.

The guarantee that the contractor willperform (performance bond) and pay itssuppliers and subcontractors (labor andmaterial payment bond) is the benefitprovided to the owner (obligee). Theobligee, which is the beneficiary of thebond, would prefer not to make a claimon the bond unless it ’s the last option.Rather, the obligee seeks assurance thatthe contractor will successfully completethe project and pay all of the suppliers andsubcontractors. While the bond guaran-tee that the surety provides to the owneris of great importance, arguably the pri-mary purpose of bonding is to prequalifycontractors.

THE THREE CsBecause surety underwriting is a continu-um, no wonder many contractors developclose relationships with their agents andsureties. Bonding companies requiretimely financial information and frequentmeetings. Contractors should work to fos-ter a strong bond with a surety. The sure-ty and the agent want clients to be suc-cessful–not only to prevent losses, but alsoto promote a healthy and profitable client.

For sureties, success relates to theThree Cs:1. Character: The surety wants a sense

that the company has the highestintegrity and that the owner is honor-able.

2. Capacity: Capacity is the expertise,manpower and experience to handlethe project. Generally a surety will con-sider a project no larger than twice thesize of the largest project completed bythe contractor.

3. Capital: Capital is the financialstrength to handle the total backlog ofthe company, whether the work isbonded or not.

MORE THAN JUST A GUARANTEEContractors can be only one bad subcon-tractor away from having an unprofitablejob and three bad jobs away from going

out of business. Along those lines, pastdue receivables devastate the cash flowand bond availability of constructioncompanies.

Consequently, sureties continuallyunderwrite their clients through detailedreview of financial statements and jobschedules. Financial statements must bereviewed or audited and received no lessthan annually, though often semi-annualreview may be preferred. Accounts receiv-able are typically the largest asset on acontractor’s balance sheet and are scruti-nized closely. Annual meetings to discussthe year completed and the year ahead allplay an important part of the underwrit-ing process.

DEATH AND TAXES Two certainties in life are death and taxes.Not many people like to talk about deathor plan for it. But when it comes to busi-ness, estate planning is critical. The stockof many construction companies may becontrolled by one or two owners. Suretiesmust understand how stock would betransferred and how estate taxes would bepaid upon the death of a shareholder.Contractors should be just as concernedas their surety, if they want the companyto remain in business after their demise.Estate planning is worth the effort in

THEBIGPICTURE:

SURETY IS MORE THAN A LINE OF CREDIT

B Y M AT T H E W RO S E N B E R G


planning for the future benefits of loyalemployees and family.

Estate planning should be a part of theoverall business plan of any company. Thebest projects usually include detailed andaccurate plans from the engineers andarchitects. Similarly, sureties view thesuperior contractors as those that havestrategic business plans that chart thegoals of the company into the future. Thishelps the surety understand the client’sneeds and desires and give advice aboutgrowing a bonding program.

JUST DON’T SAY NOEveryone wants to hear the word “yes,”but a surety sometimes says “no.” Suretiesmay take issue with the job size, the typeof work or the total workload (backlog) ofthe contractor client. Certainly, a discus-sion should occur prior to or immediatelyafter a declination in case the underwriterdoes not have all the facts or does notunderstand all of the issues of the project.For example, the project could be moreequipment-intensive, or the job could beexactly within the contractor’s niche, butis simply larger than its typical project size.

On the other hand, the job may not bethe best project for a contractor, and thesurety sometimes proves to be the voiceof reason. The surety should be viewed asa member on the board of directors. Itprovides a more impartial vantage pointthan the owners or executives of a con-struction company. The surety’s unbiasedand experienced viewpoint can prevent a

problem before it is realized, or at leasthelp a contractor get back on track.

Several years ago, a surety required oneof its contractors in Sacramento, Calif., toobtain a bank line of credit despite thecontractor’s continuous objection. Thesurety’s advice can literally save a client’sbusiness. Yet to this day, the contractorstill complains at each underwritingmeeting about the need for a bank line.What he fails to remember is that thebank line saved the company when it hadsome large past due receivables thatalmost devastated its wellbeing. Without

the bank line, that contractor would sure-ly be out of business today.

Occasionally, contractors are surprisedto see competition that they do not hold inhigh regard on a bid list. Yet, some contrac-tors are more financially secure than onemight imagine. Some contractors may postcollateral or use third-party funds adminis-trators. Others may obtain backing from acompany with more financial strength thatcosigns on the indemnity agreement like afather cosigning his son’s car loan.

These are not ideal methods of obtain-ing bonds. Sureties would rather see acompany stand on its own merits throughyears of profitability, guided by a soundbusiness plan.

Construction companies shouldremember three important points. First,remember that the surety provides busi-ness counseling as part of its service toclients. Second, the surety wants to workwith companies that have a solid organiza-tion and a knowledgeable team of advisors.Finally and most importantly, the suretywants you to succeed as much as you do.

Rosenberg is vice chairman of Rosenberg &

Parker, Inc., Bala Cynwyd, Pa. For more infor-

mation, call (610) 668-9100, ext. 104 or email

[email protected].


Qualities of a SuccessfulContractor: A Surety PerspectiveContractors that obtain the most from their surety program possess many of thesame traits:1. They are highly disciplined and organized. 2. They stay within their niche and geographic territory. 3. They take calculated risks that involve great thought and debate within the organ-

ization and through advisors. 4. The best companies have a team of professionals that they rely on in decision-

making:• accountant;• banker;• lawyer;• surety agent and company; and• insurance broker.

5. Highly successful construction companies set goals and plan for the future. 6. They develop solid internal controls such as hiring a qualified controller/CFO.7. They know their cash flow and aged receivables (those over 90 days).8. They keep track of the profitability on all substantial projects. 9. They can answer virtually every question a surety may ask or quickly find the

answer.

SURETIES VIEW THE

SUPERIOR CONTRACTORS

AS THOSE THAT HAVE STRATEGIC BUSINESS PLANS THAT CHART THE GOALS OF

THE COMPANY INTO THE FUTURE.



One of the critical elements needed toestablish and maintain a solid surety rela-tionship is open communication. This isnot only essential when times are goingwell, but also when times are not goingas planned.

How a contractor handles the impact ofa bad project or a bad year often determineswhether a business will survive or fail.Because getting new work is usually criticalto working through problems, maintaininga strong surety relationship is essential.

No one relishes delivering bad news.When contractors get into trouble, some-times they tend to wait too long to let theirsurety know of the situation. As a result,when the surety becomes aware of the prob-lems, many of the options available to han-dle those problems no longer exist. On theother hand, if the surety learns of a prob-lem early on, it likely will have resourcesavailable to assist in solving the issue.

Most surety companies in the industrytoday have been around a long time.Because surety is a very specialized indus-try, most tenured professionals in the busi-ness have developed a significant amountof experience entailing both positive andnegative situations with contractors.

As a result of having dealt with negativeexperiences over the years, a surety typical-ly does not overreact to bad news. Rather,the surety works closely with the contrac-tor to develop strategies to overcome anyproblems and get back on track.The earlierproblems are communicated, the more like-ly they will be solved and the faster the con-tractor will be back on track.

Contractors do not want to communi-cate bad news for two reasons. One is asense of optimism that other work will off-set the bad job. Thus, when discussing thebad project with the surety, the overallimpact could already be in the past.

Another is the perception that the sure-ty will overreact and suspend surety sup-port, or that a surety’s claims operation willhave to get involved. Obviously, these twooutcomes are not ones a contractor looksforward to. However, being in a suretyclaims department does not necessarilymean a contractor has or will cause a suretya loss. In fact, a vast majority of activity in asurety’s claims operation is related to issuesinvolving solvent contractors that are get-ting continued support from the surety’sunderwriting team.

Surety claims fall into three basic cate-gories. The first category involves a situa-tion where a solid contractor has a legiti-mate dispute with an owner, a subcontractoror a supplier. Typically the dollar amountsare small and the ultimate outcome will bea settlement handled between the partiesinvolved, with the claim resolved relativelyquickly. Generally, this will involve very lit-tle activity on the part of a surety claimsoperation.

The second category of claims is muchmore serious, but the surety still does notexpect an ultimate loss. These types ofclaims can be time-consuming and typical-ly involve a great deal of interaction amongthe contractor, the surety claims operationand the underwriting team. Contractorsthat end up with claims in this category gen-erally are experiencing problems with onejob rather than having systematic problems.One project might have significant changedconditions, a difficult owner or poor design.While the contractor has the technical abil-ity to complete the project, the cash drain issuch that the contractor cannot completethe job without financial assistance.

A common thread in these situations isa strong claims case against the owner wherethe contractor can recover considerablemoney in a reasonably short period of time.

The combination of this recovery and newwork supported by the surety results in thecontractor working its way out of the prob-lem and getting back to normal business.

The above situation features one of thehidden values a project owner gets from asurety bond. The contractor’s work with aparticular owner or owners may be goingalong quite well. The owner would be sur-prised if the contractor said it could not fin-ish the project. With the surety’s assistance,the contractor can keep all work on tracktoward completion, honoring all obliga-tions to owners, suppliers and subcontrac-tors. Obviously, the contractor benefits bybeing able to continue in business rebuild-ing financial strength and making the sure-ty whole. Communication is vitally impor-tant if a contractor and surety end up in thistype of claims situation.

The third category of claims situationsinvolves the contractor being unable tocomplete the work, thus needing the sure-ty. When the situation gets this dire, it isdifficult for the surety not to lose money.With considerable cooperation from thecontractor, the loss to the surety has a goodchance of being substantially mitigated.Hopefully, when a problem arises, earlycommunication and cooperation betweenthe contractor and surety can help avoidthis scenario completely.

Open communication and cooperationprovide tremendous benefits for all involvedin the project—not just in claims situations.The owner receives qualified contractors tobid the work competitively, thus getting thebest value for the project. The subcontrac-tors and suppliers on the project receivepayment bond coverage guaranteeing thatif they are legitimately owed money theywill be paid.The surety generates profitablepremiums by writing the bond—givingfinancially sound surety companies themotivation to stay in the business andmaintain a competitive surety climate.

And finally, the contractor maximizesits surety credit, allowing it to take advan-tage of opportunities to grow its business.

Mikolajewski is vice president, director of

contract surety for Safeco Surety, Redmond,

Wash. For more information, call (425) 376-

6564 or email [email protected].

COMMUNICATION &SURETY CLAIMSA Surety Can Help a Contractor Get Back on Track

B Y T I M O T H Y M I KO L A J E W S K I

T



COMPONENTS OF A

SUCCESSFULSURETY RELATIONSHIP

B Y M I C H A E L D O U G H E R T Y

The surety industry has paid billions of dollars of losses overthe last few years. Now the industry sees a renewed effort toincrease both the level and intensity of the underwritingprocess. More than ever, contractors must proactively managetheir surety relationship. What does this entail? Below is a setof questions to help assess the level of the relationship you havewith your surety carrier.

1) I know the name of the surety company that issues bonds onmy behalf.True False

2) My surety company representative is active in constructionassociation events and is knowledgeable about local and region-al market conditions.True False

3) How often do you meet with a surety company representative?a) Never 0 pointsb) Every couple of years 2 pointsc) Annually 4 pointsd) Two or more times annually 6 points

4) I know the parameters of my bonding program and/or mytotal level of bonding support.True False

5) I provide quarterly updates of my work-in-progress to mysurety company.True False

6) If I have a project that is going poorly and may impact myfinancial results, I inform my surety agent and bonding compa-ny as soon as possible and make sure they understand the issuesand potential impact.True False

7) I know the underwriting results of my surety company andtheir track record of profitability.True False

8) I produce quality internal financial statements each monthand provide them to my surety company on a quarterly basis.True False

9) A representative of my surety company has visited one of my job-sites and I am comfortable the company understands my business.True False

10) My surety company representative receives the same level ofaccess and interaction as my banker and/or other creditproviders.True False

11) When considering a large unbonded project, I solicit inputfrom my surety agent and/or company on the impact it couldhave on my firm and/or my surety bonding line.True False

Score “2” points for every true response and “0” for every responsemarked false.

20–26 Excellent—you are proactively managing your suretyrelationship.

14–20 Good—your relationship is solid but could beimproved.

8–14 Needs Work—consider increasing the level of contactand communication with your surety company andagent.

< 8 Poor—you may be a limited user of surety credit.However, if surety credit is important to your business,you should work toward significant improvement inthe surety relationship.

A construction company’s success will be determined by itsability to manage relationships successfully with owners, othercontractors or subcontractors, suppliers, bankers, sureties andother credit providers. At the heart of any successful relation-ship is the need for timely information exchange, proactive com-munication and a clear understanding of each party’s expecta-tions. Make the time to develop a strong relationship with yoursurety bond producer and surety company representatives. Intimes of uncertainty, these relationships will be worth exactlythe time and effort you spent building them.

Dougherty is senior vice president of CNA Surety, Chicago. For more

information, call (312) 822-2982 or email [email protected].


Joint ventures have gained increased pop-ularity among contractors in recent yearsas the preferred means of sharing andmitigating construction risks. Joint ven-tures are primarily associated with large,complex and long-term projects. Fewpublished statistics (if any) can help shedlight on the risks and rewards of usingjoint ventures.

However, there has been only one sure-ty bond loss involving a project performedunder a formal joint venture arrangement.In a surety industry that has paid out $6.5billion in direct losses on bonded jobs overthe past 10 years, this speaks volumesabout the merits of employing joint ven-tures as a risk-mitigation technique.

Not all joint ventures are successful.Those that are, tend to work because thecapabilities, expectations and responsibili-ties of each party are defined well inadvance of the first certification beingdrawn. Every joint venture is essentially aformal partnership between two or moredistinct parties, each with its own set ofcircumstances, needs and perceptions ofrisk and reward. The more the partnersknow and understand each other, the morelikely they will be successful in workingtogether and using each other’s strengthsto maximize their own objectives.

Most successful joint ventures sharethese two common characteristics:• They are made up of two or more organ-

izations that understand what they wantand expect from each other.They are con-fident that the other parties can performand honor their share of the obligations.

• They rely on a well-defined joint ven-ture agreement that clearly specifies theventure’s business objectives and spellsout the essential obligations; i.e., spon-sorship percentages, assignment of thejoint venture parties’ several responsibil-ities, insurance coverages, funding andequipment contributions, personnel,

procedures, purchases, managementauthority/controls, dispute and defaultresolution, profit recognition and distri-butions, assignment of rights, pricing,bank relationships, records and account-ing policies.

WHY ENTER INTO A JOINT VENTURE?The reasons for formulating joint venturesare numerous. More often than not, jointventures form because of a mutual interestby two contracting parties in sharing andspreading the risk associated with large,complex or long-term contracts, whichcould have dire consequences if all doesnot go as planned. Other reasons can beas simple or as varied as:• to tap one another’s unique skills

and/or assets (equipment, personnel);• to gain complimentary skills or pool

resources;• to take advantage of local geographic

and/or sub-trade knowledge andexpand market penetration;

• for political connections and/or ownerrelationships;

• to maximize surety capacity and/orinfluence surety underwriting;

• to meet set aside requirements;• to obtain pricing security (i.e., second

opinion);• to strengthen financial structure and/or

prequalification validation;• to meet prequalification requirements—

experience, capacity, licensing; or• to comply with federal, state or local

regulations/bidding requirements.There is no standard joint venture—

they can take several forms. While mostare prime and limited in scope to a singlejob, a joint venture can be incorporated oreven left open indefinitely, with the abilityto take on new projects all the time. Somejoint ventures are silent, with only one con-tractor appearing on the contract and/orbond, but this situation does not lessen the

silent party’s duty to perform or indemnifyall of the contractual obligations.The forma joint venture takes is often determinedby the nature of work, size, duration of thecontract, skills and qualifications of eachjoint venture partner.

RISKSEach contractor should consult its attor-ney, insurance agent/broker and account-ant before entering into a joint ventureagreement because of legal obligations,insurance issues and tax consequences.

Use care in selecting joint venture part-ners as each will be fully liable (jointly andseverally) to the owner, subcontractors, sup-pliers, third-party claimants and sureties,irrespective of the defined obligations ofthe joint venture agreement.

It is not only proper, but also obligato-ry for each party in the joint venture to askfor and receive a full disclosure of thefinancial standing, work programs andother commitments of each prospectivepartner—and to provide the same whenasked. It is common practice for therespective sureties to underwrite thefinances and capabilities of the counter-parts to a joint venture and prequalify thejoint venture in its entirety.

Sureties do not look favorably on “angeldeals” in which a contractor lends his bal-ance sheet to another for surety capacitywhile having no real involvement in themanagement and execution of the bondedproject. With the increased emphasis onsurety prequalification of contractors, someconstruction firms attempt to leveragetheir lack of surety capacity by using anoth-er firm’s surety credit.

Joint venturing can be a beneficial wayto gain additional work and experience andexpand a firm’s market penetration. But itshould only be approached with full appre-ciation of the risks involved, full knowl-edge of the prospective joint venture part-ners and after consultation with anattorney, tax accountant and surety allfamiliar with joint venture obligations.

Cheatham is president of Zurich North

America Surety, Baltimore. For more informa-

tion, call (410) 261-7690 or email william.

[email protected].

BONDINGJOINT VENTURES

B Y W I L L I A M C H E AT H A M


T



The ability to obtain surety bonds is morethan gaining access to new markets—it’sabout building business relationships. Thesurety industry has gone through a num-ber of changes in the past five years—including a number of high-profile merg-ers and departures—and the relationshipbetween contractor and producer hasbecome more important than ever.

The primary purpose of a surety bondis to provide project owners assurance thatthe contractor is prequalified to bid andbuild the specific project. As such, a sure-ty bond producer will work very closelywith a contractor to ensure that a suretycompany’s underwriting criteria can bemet. Professional surety bond producerscan serve as an objective, external resourcefor evaluating a contractor’s capabilities.As an advisor, the producer may offerinsights about how best to adapt a con-tractor’s business plan to a surety compa-ny’s underwriting needs.

In today’s surety market, contractors arebeing asked to supply more detailed finan-cial statements on a more regular basis.Personal indemnity is much more likely tobe required, and continued pricing disci-pline will occur, especially at the upper-endof the market where capacity is the primaryconcern of the contractor. In some cases,more creative approaches to bonding willbe needed—especially on long-term ormega-projects. Contractors working witha professional surety bond producer have aclose ally who is well-informed and pre-pared to help the business adapt to thesecurrent market features.

Contractors who have established solidrelationships with a surety bond producerand surety bond company during thesetimes of change should consider the value

of such relationships. Having a long-standing business relationship is an intan-gible, yet invaluable asset. A contractorshould think twice before abandoningsuch relationships, especially during timesof uncertainty.

While the surety credit limits andunderwriting terms may not always beto a contractor’s liking, the surety com-pany and surety bond producer will workdiligently to help a contractor meet itsbonding needs. Surety credit is no longeravailable to just anyone, however, well-capitalized and well-managed contrac-tors can use these somewhat turbulenttimes as a competitive advantage in themarketplace.

Contractors seeking to establish a newbonding program would be well-advisedto seek out the services of a professionalsurety bond producer. It is essential that acontractor work with a qualified, compe-

tent, professional surety bond producer toobtain the best advice and insights thathave a business’ long-term interest in mind.

A surety bond producer does not actmerely as a gatekeeper to the surety com-panies. He or she possesses a wealth ofknowledge about the latest trends andlegal issues affecting the surety industryand acts as a close advisor to contractorsto help them navigate the rigorous pre-qualification process.

The specific roles of a surety bond pro-ducer are numerous and diverse. A suretybond producer:• Matches the needs and strengths of the

contractor to the surety company thatwill best support the contractor;

• Offers sound business advice, man-agement consulting services and tech-nical expertise—or introduces the con-tractor to appropriate professionals orconsultants;

A CONTRACTOR’S LINKTO BONDING SUCCESS

B Y C R A I G E . H A N S E N

What to Look For in a Surety Bond ProducerA professional surety bond producer:• is well-respected and has a reputation for integrity in the construction industry; • demonstrates a personal interest in the contractor’s success; • has a track record of building solid relationships with surety underwriters; • possesses an understanding of the construction industry; • has knowledge of accounting and finance, especially construction accounting

procedures; • has knowledge of construction contracts, subcontracts and related contract law; • is aware of local, regional and national construction markets; • is experienced in strategic planning and management practices that promote suc-

cessful contracting; and • is actively involved in and supports local and national construction and surety

industry associations such as the National Association of Surety Bond Producers(NASBP) and Associated Builders and Contractors.

THE SURETY BOND PRODUCER:


• Compiles financial documents for sub-mission to the surety. In some cases, theproducer may analyze the financialstatements to determine the contractor’sworking capital, net worth and currentrevenue;

• Reviews contract documents to deter-mine if the contractor is taking exces-sive risk;

• Conducts a background investigationof the contractor’s past contractualobligations;

• Recommends a responsible line ofcredit consistent with the contractor’scapabilities;

• Tailors the contractor’s submission for thespecific needs and requirements of thesurety company and guides the contractorthrough a formal presentation; and

• Maintains communication between thecontractor and surety company withperiodic reports on work progress, finan-cial performance and business plans.

Whether a contractor is seeking a bond

for the first time or wants to continue togrow a bonding program, the advice andinsights available from professional suretybond producers are invaluable in today’smarket.

For more information on surety bondproducers, visit the National Associationof Surety Bond Producers website atwww.nasbp.org and click on “Need aBond,” or call (202) 686-3700. NASBP

members are professionals in the suretybond marketplace and adhere to a code ofprocessional standards.

Hansen is senior vice president of Holmes

Murphy & Associates, West Des Moines, Iowa,

and president of the National Association of

Surety Bond Producers (NASBP). For more

information, contact NASBP at (202) 686-3700

or email, [email protected].


Serving the Surety MarketSince 1934

� One of the top 25 surety writers nationwide.*

� Specializing in Contract Bonds up to $10 million.

� A “Common Sense” underwriting approach.

� Provide superior service in the industry.

A.M. Best Rating “A” (Excellent)

To learn more, visit www.merchantsbonding.com or phone 1-800-832-4904

*According to the Surety Association of America

2100 Fleur DriveDes Moines, Iowa 50321515-243-81711-800-678-8171Fax 515-243-3854

CORPORATE HEADQUARTERS

WHETHER A CONTRACTOR IS SEEKING A BOND FOR THE FIRST TIME

OR WANTS TO CONTINUE TO GROW A BONDING PROGRAM,

THE ADVICE AND INSIGHTSAVAILABLE FROM PROFESSIONAL SURETY

BOND PRODUCERS ARE INVALUABLE IN TODAY’S MARKET.

M



Many contractors are familiar with the threeCs of surety, the three factors that suretieshave historically employed in underwritingthe construction industry: capacity, charac-ter and capital. Unprecedented surety loss-es, industry consolidation and other factorshave transformed this historical model.There are still three Cs, but their definitionshave changed.

THE FIRST C OF SURETYThen: Capacity—the Contractor’sNow: Capacity—the Surety’s

Capacity used to refer to a contractor’scapabilities in managing its work andfinancial resources. These fundamentalscertainly remain critical to obtaining sure-ty bonds, but the term capacity in thesurety industry today more often refers toa surety’s ability or willingness to providesufficient levels of bonding to support itscontractor clients’ business plans.

The surety industry as a whole sufferedanother poor year in 2003. The SuretyAssociation of America reported an indus-try-wide net-loss ratio of 62 percent, mean-ing sureties—in total—lost roughly $1.15for each dollar of premium written. Whilesome sureties enjoyed good results in 2003,returning to profitability as the result of theincreased underwriting and pricing disci-pline that began in early 2001, most did not.

Surety reinsurers (those companies thatshare sureties’ risk) are looking at a sixth

consecutive loss year. Loss developmenton prior year claims has been significant—indicating the industry’s poor results in2001 and 2002 were actually worse thaninitially posted. This was demonstrated inlate July, when a leading surety announcedan increase in reserves of more than $600million. It is too early to gauge the reac-tion of reinsurers to this action, but thesize of the reserve adjustment alone willsignificantly impact the surety industry’soverall 2004 results. Underwriting disci-pline has restored profitability to somemajor surety players, but as of June 2004,the Surety Association of America report-ed an industry-wide loss ratio of 77 per-cent for the first six months of the year. Inthe first six months of 2004, suretiesincurred an additional $1.48 billion oflosses—prior to the $600 million reserveincrease. This means, overall, the suretyindustry is again losing well over a dollarfor each dollar of premium it writes.

In a nutshell, large buyers of suretycredit or any contractor that has experi-enced poor financial results can expect thecost of available surety credit to continueto rise and involve additional security orcollateral.

A tempering factor on rate inflation iscompetition for middle-market contrac-tors’ business (defined as those with workprograms of $20 million to $200 million).The cost of reinsurance and the changesin some major sureties’ business models

have driven this phenomenon. This sec-tor of the market also has seen an influxof competition from regional sureties thathave benefited from a migration of sure-ty reinsurance away from national writ-ers. Even these middle-market contrac-tors, however, have experienced increasedunderwriting scrutiny, requirements forinformation and, in some cases, changedterms.

Historically, contract surety premiumshave constituted between 55 percent and60 percent of total surety premiums. Thecharts (see next page) illustrate contractsurety results compared to constructionactivity in the United States over a 15-year period ending in 2002 (2003 contractsurety data is not yet available). The“Value of Construction Put in Place” rep-resents the value of public and non-resi-dential construction expenditures as arough equivalent of bonded exposures.The numbers are actual and not adjustedfor inflation. Comparisons to theConsumer Price Index indicate that sure-ty pricing, in aggregate, trailed inflationby roughly 40 percent from 1990 to 2000.As the graph illustrates, sureties havebegun to close the “risk gap” of pricingrelative to bonded exposure to a level that,historically, has proven profitable.

Another trend receiving increasingattention from contractors and ownersalike is the reduction in financial ratingsof sureties, their parent groups and rein-

THE“THREE Cs”

OF SURETY…THEN AND NOW

B Y M I K E A N D E R S O N


surers. These reductions affect the abilityof companies to write business, raise cap-ital and find acceptable co-surety partnersor partners in joint venture project bonds.All indications are this will be an increas-ingly high-profile issue for contractors in2005 and beyond.

Some new surety capital “put a toe inthe water” in 2003 and reinsurance capac-ity has expanded in 2004, although withno relief on pricing or terms. Arch enteredthe business by retaining Kemper’s suretyteam. Berkshire Hathaway established ashared reinsurance facility with AIG tosupport large contractor programs withcapacity. Quanta entered the commercial

surety market. Rather than reflecting areturn to a more accommodating under-writing environment, these initiatives maywell represent opportunistic capital thatwill be employed in underserved marketsand with discipline.

Access to capital remains the issue forsurety managers. Competition for capitalhas fundamentally changed the way rein-surers view the surety line of business. Inthe past, capacity was allocated based onprior loss experience and underwritingpractices. Since the surety losses of 2001,reinsurers have focused on terms of expo-sure and the potential dollar loss any sin-gle risk might generate, regardless of a

surety’s underwriting track record. Thisexposure-based modeling has the poten-tial to impose even greater demands forcapital to support the same level of writ-ten premium. Already it has increasedreinsurers’ scrutiny on individual accountswithin a surety’s book of business and pre-cipitated the withdrawal of support forcertain types of surety bonds.

THE SECOND C OF SURETYThen: CharacterNow: Consolidation

Character has always, and will continue tobe, a critical part of the surety equation.Character is often what allows a surety toextend credit to a contractor when thenumbers might indicate otherwise.Consolidation in the surety industry, how-ever, has been a key driver in the contrac-tion of available surety credit. Over the pastfive years, the market share of business writ-ten by the top dozen writers has increasedfrom 63.1 percent to 71.3 percent.

The merger of St. Paul and Travelers,the latest in a series of significant suretymergers and integrations, will create asurety operation with a market share thatis more than double that of its next largestcompetitor. The capital demands of thesurety line, driven by the requirements forincreased retention of risk at the primarysurety level, are likely to force furthereconomies of scale. Continued consolida-tion will serve as a governor on the suretyindustry’s ability to expand capacity.

THE THIRD C OF SURETYThen: CapitalNow: Communication

Users of surety credit will never be able toobtain surety support without capital atrisk. In today’s marketplace, however,those contractors that most effectivelycommunicate with their sureties abouthow they plan to manage and grow thecapital base of their companies will enjoyadvantageous terms.

Many successful firms work with theirsurety underwriters as they would withinvestors or lenders. Professional suretyunderwriters understand the up-and-


By December 2002, the gap between ‘bonded exposures’ and surety premiums returned to anorder of magnitude of roughly one, comparable to that which existed during a period of prof-itability for sureties in the early 1990s.

Sources: United States Census Bureau data and Surety Association of America data.

In the period from January 2000 through December 2003, sureties incurred more than $8.05 bil-ion in losses, an amount higher than the total losses over the prior dozen years.

Source: Surety Association of America

490.4 554.6364.9

600.6

281.9

588.5473.8 483.1 481.4

765.8614.9

1,105.8

2,748.4

2,363.9

1,833.2

1989

3,000

2,000

1,000

0

1991 1993 1995 1997 1999 2001 2003

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Value of Construction Put in Place (in 000’s Billions $)

Earned Contract Surety Premiums (in 000’s Billions $)

Incurred Contract Surety Losses (in 000’s Billions $)



down nature of the construction businessand would rather a contractor client bringthem bad news or poor results than sur-prises. Whether it is a bad project, aprospective shareholder buy-out or diffi-culties in getting paid by an owner, thesooner the underwriter is brought into theloop, the better the chances of minimiz-ing or avoiding any impact to the client’sbonding line.

Sureties are giving individual contractprovisions increased scrutiny and negoti-ating pricing for individualized risk. Somesureties have begun implementing sur-charges for capacity, extended warrantyobligations and other risk-specific con-siderations—such as long-term contracts(e.g., those with durations beyond 24months). Recent material price increasesfor steel, lumber, cement and fuel havemade sureties more interested in a con-tractor’s risk analysis, particularly forfixed-price work.

Sureties have been increasing securityand personal indemnity requirements. Anumber of underwriters now incorporatesecurity interest provisions in their generalagreements of indemnity and require thattheir security package be on par with aclient’s lenders.Many agreements now con-template a surety enforcing the indemnitywithin a bankruptcy proceeding, not nec-essarily with a view toward workingthrough a solution with the contractor. Anyrequest by a surety for new indemnityagreements should be carefully reviewed bya surety broker and an attorney to assure itsprovisions do not conflict with existingsecurity given to other creditors.

The increased demands of the currentmarketplace put underwriting staff underpressure. Lead time, as well as clear, con-cise financial reporting and detailed proj-ect risk analysis can be the differencebetween acceptance and declination.

Communication in a surety relation-ship should run in both directions.Contractors should question their suretyabout the financial quality and stability ofthe surety’s parent company (when appli-cable), its surety reinsurance partners, thesurety’s own results and any anticipatedchanges in the surety’s capacity or under-writing approach.

STEPS TO TAKEContractors can take the following stepsto increase the stability of their suretyrelationship:• Be certain surety underwriters are fully

aware of all aspects of a company’s busi-ness plan and information is presentedin a way that clearly addresses the truerisk profile of the plan. From financialbenchmarking to programs that reduceproject scheduling risk, several tools areavailable to maximize the surety creditextended to a firm.

• Review strategies to protect the compa-ny’s balance sheet. The balance sheet’scondition or exposure is directly relatedto the surety’s determination of howmuch surety capacity it will extend.Proven methods are available to identi-fy and creatively fund both project riskand enterprise risk in ways that canimprove a contractor’s bottom-lineresults.

• Investigate, with the assistance of a pro-fessional surety broker, co-surety struc-tures and stand-by surety relationshipsto assure capacity and continuity of sure-ty support regardless of marketplaceevents. Ask a broker how it monitors asurety’s financial ratings.

• Examine, where appropriate, alternativesubcontractor performance default risksolutions. These solutions can increasethe control a client has over its manage-ment of this risk and create opportuni-

ties to widen the participation of minor-ity business enterprises (MBE), women’sbusiness enterprises (WBE) and othersubcontractors that might otherwise bequalified, but cannot obtain bonding intoday’s marketplace.

• Employ a professional surety brokerwith sufficient resources to continuallyanticipate market conditions that mightimpact a surety program. If a broker doesnot maintain regular contact with seniorsurety executives, its clients may fallbehind the information curve.

Those buyers and users of surety cred-it expecting a return to a more relaxedenvironment for obtaining surety credithave to wait a bit longer. Managers ofsurety capital and surety reinsurers stillconcerned about the industry’s results mayhave not seen the worst. While clear indi-cations of a return to a soft commercialinsurance market exist where surety isconcerned, the primary factor in obtain-ing surety capacity today is the nature andduration of a contractor’s exposures. Thisfundamental shift in emphasis may bewhy the surety marketplace will remainconstricted despite any market softeningon the insurance side.

Anderson is managing director for construc-

tion and international surety at Willis, a glob-

al insurance broker. He works in Radnor, Pa.

For more information, email mike.anderson@

willis.com.

Key Players in the Surety Industry: 1999 vs. 2004

1999 Those Sureties as of July 2004

St.Paul St.Paul / Travelers / Fireman’s Fund

Zurich Zurich

CNA Surety CNA Surety

Reliance Sold to Travelers in 2000

AIG AIG

Travelers To merge with St.Paul in April 2004

Liberty Mutual Liberty Mutual

Frontier Exited the business in 2001

Chubb Chubb

Fireman’s Fund Sold Surety renewal rights to St.Paul in 2002

Safeco Safeco

Amwest Exited the business in 2001

Source: Surety Association of America data

D



Declining interest rates and skyrocketinglitigation costs are just a couple factorsaffecting the insurance industry over thepast few years. These changes have ledmany contractors to become resourcefulwith various insurance coverages.

Contractors have found several strategiesto weather the current insurance climate.

THE PLUSES AND MINUSES OF OWNER-CONTROLLED INSURANCEIf the insurance policies necessary for thetypical construction project were scat-tered over a jobsite, they’d probably comeclose to covering every square foot.Owners, general contractors, subcontrac-tors, architects and others involved in theproject all want to protect themselvesfrom risk.

All of these policies may provide indi-vidual parties with the coverage theywant, but the policies can prolong claimresolution with extended infighting andfinger pointing. In addition, multiplepolicies add to the cost of the project.

In response to these complications,more and more owners have embraced adifferent option in recent years: owner-controlled insurance programs (OCIPs).Because OCIPs allow owners to buy mas-ter coverage for all project contractors,these policies can save 1 percent to 1.5percent of total project costs.

EXPANDED COVERAGEOCIPs are nothing new. They’ve beenaround since the 1950s. But they’vebecome almost common now, not only

because volume buying gives owners dis-count purchasing power, but also becauseOCIPs sometimes provide coverage thatcan otherwise be cost-prohibitive orunavailable to individual contractors.

OCIPs can cover difficult-to-insurelosses associated with mold, pollution andexterior insulation and finish systems. Butdo they benefit contractors along withowners? That depends, experts say.

On the plus side, OCIPs sometimesprovide coverage not included in an indi-vidual contractor’s policies. Certainly thisblanket coverage is more convenient for acontractor and, with its single-sourceresponsibility, a properly administeredOCIP can speed claim resolution.

In addition, OCIPs may open the doorfor projects that might otherwise beblocked by problems obtaining insurancecoverage, such as multi-family residentialbuildings. But OCIPs aren’t the answerfor every project. Contractors should learnas much as possible about their provisionsbefore bidding on projects.

POSSIBLE PITFALLSOne of the biggest pitfalls for contractorsis completed-operations coverage.Thoughstate laws vary in time limits for claimsafter construction is complete, most ofthese claims come more than five yearsafter occupancy.

If the OCIP limits coverage to fiveyears after completion, a contractor couldfind its company uninsured. Contractorscan face this exposure even if liability poli-cies would ordinarily cover 10 years after

completion, because many contractorinsurance policies exclude work per-formed under an OCIP.

Before bidding on an OCIP project,discuss the potential exposure with aninsurance advisor. Bids should reflect afull understanding of all risks.

First, be sure to completely grasp exist-ing insurance coverage to accurately assessrisk. In some cases, OCIPs may providebetter coverage than an existing policy. Inother cases, a company may need to adjustits pricing to reflect uncertainties thatcome with an OCIP.

COST WORKSHEETSUsually, contractors bidding on OCIPprojects must submit a cost-calculationworksheet showing insurance costs with-out OCIP coverage. The owner thendeducts that expense from the winningproposal. Be sure the deduction is notgreater than the true cost of insurance.

In addition, OCIP contracts typicallyrequire contractors to perform adminis-trative duties that aren’t likely to be reim-bursed for the extra costs that come withthose tasks. OCIPs also eliminate con-tractors’ markups on insurance costs, cut-ting off the possibility for recovering extraadministrative overhead expenses.

SOME BENEFITSOCIPs probably offer more real benefitsto owners and developers than to contrac-tors. But with care and expert advice, con-tractors can participate with confidencein projects covered by these policies.

THECURRENTINSURANCE CLIMATE

FOR CONTRACTORSOCIPs Can Cover Difficult-to-Insure Losses

B Y K E N T T H O M A S , C P A


HOW TO DEAL WITH THE LIABILITYINSURANCE SQUEEZEAfter weathering two decades of unre-strained construction defect litigation,many liability insurers are opting not towrite coverage for residential contractors.Others are attaching exclusions to contrac-tors’ general or umbrella liability policiesor limiting the geographic regions or thepercentage of problematic work allowed.

Construction defect litigation hasbecome so widespread that some law firmsnow specialize in it. Most claims involvemulti-family residential developmentssuch as condominiums or townhomes,though dissatisfied single-family home-owners also initiate lawsuits.

At times, the suits are related to onlyminor defects, but industry analysts esti-mate litigation has added an average of$20,000 each to the cost of housing unitsin Southern California alone.

COVERAGE DIFFICULT TO FINDAs a result, contractors relying on liabilitycoverage against construction defectclaims find it increasingly difficult toobtain that coverage. When they do, theprice is high.

Subcontractors are particularly vulner-able, as claims against other contractorsoften touch them, too. Some subcontrac-tors left the residential construction mar-ket when insurance became unavailableor prohibitively expensive.

The good news is that a number ofstates have enacted “right-to-repair” laws

that require homeowners (or homeown-ers’ associations) to give builders theopportunity to correct any problemsbefore initiating legal action.

These laws establish proceduresintended to keep legitimate constructiondisputes out of court, to curtail frivoloussuits and to detail responsibilities of bothbuilders and buyers.

These laws are expected to help reopeninsurers’ doors to contractors by reducingthe threat of legal judgments. But in stateswithout such laws, contractors can do lit-tle to avoid being named in a construc-tion defect suit or to obtain affordableinsurance coverage.

SIGNIFICANT LIMITATIONSEven when they continue to offer con-struction liability coverage, insurance com-panies are putting significant limits on thatcoverage. One court ruling in particular hasreduced liability insurance availability: TheCalifornia Supreme Court ruled in 1995that knowing about losses or potential loss-es at the time an insurance policy is pur-chased does not invalidate coverage untilthe insured’s actual degree of liability hasbeen determined.

As a result, insurers have developed“known injury or damage” provisionsexcluding injuries or damages from con-ditions known at a policy’s inception.

In addition, many insurers have target-ed a number of common types of con-struction defect claims for exclusionaryendorsements. At the top of the list is

damage related to the use of syntheticstucco, or exterior insulation and finishsystems (EIFS).

Contractors involved even indirectlywith this regionally popular buildingmaterial are often not covered for anyinjury or damage connected to it.Seemingly unrelated subcontractors, suchas roofers and window installers, are notimmune either, if their work can be tiedto damage resulting from moisture pene-tration of EIFS.

MOLD OFTEN EXCLUDEDMold is another area that has promptedexclusions. Although the long-term effectsof toxic mold on people remain uncertain,it can clearly produce significant propertydamage. And because of the number ofmold claims, even pollution liability insur-ers now routinely exclude mold from theirpolicies, though some will provide cover-age for an additional premium.

Coverage also may exclude damagecaused by earth movement or subsidence,including landslides, earthquakes, mud-slides, settling or erosion. For subcontrac-tors, insurers may exclude residential con-struction as a class. This exclusion on asubcontractor’s liability policy can affectcoverage a contractor may have had as anadditional insured under the policy.

CLOSE STUDY NEEDEDContractors must examine their policiescarefully for language limiting coverage.For example, some EIFS exclusions mayeliminate coverage for every part of astructure with EIFS, regardless of whethera claim arises from the EIFS section.

In any case, in addition to stringentquality control, contractors can bestdefend themselves against the onslaughtof construction defect litigation by acquir-ing a detailed understanding of theirinsurance policies and monitoring thosepolicies for revisions that may increasetheir exposure.

Thomas is a shareholder with the regional

certified public accounting and consulting

firm of KAWG&F, Towson, Md. For more

information, call (410) 828-CPAS or email

[email protected].


CONTRACTORS MUST EXAMINE THEIR POLICIES CAREFULLY FOR LANGUAGE

LIMITINGCOVERAGE.FOR EXAMPLE, SOME EIFS EXCLUSIONS

MAY ELIMINATE COVERAGE FOR EVERY PART OF A STRUCTURE WITH EIFS,

REGARDLESS OF WHETHER A CLAIM ARISES FROM THE EIFS SECTION.

CContractors and owners must continue tostrive for the safest jobsites possible.Perhaps the ultimate jobsite safety issue,which is often overlooked, is the draftingand implementing of a well-reasoned cri-sis management plan.

Most companies focus on avoiding thetraditional jobsite safety risks and com-mon construction problems, such as costoverruns, delays and defects. However,contractors and owners also must devisecontingency plans in case of war, terror-ism, earthquakes and extreme weather thatcan destroy projects or their supply lines.

Crisis planners must carefully identifyall risks, list potential damages, create astep-by-step response, establish emer-gency response teams, analyze back-up orredundant systems, stockpile emergencysupplies, plan evacuation routes, set upinformation procedures and providestrategies for restoring the project quickly.

IDENTIFY THE RISKSCrisis management plans often can beinadequate because they do not take intoaccount all the significant potential riskthat may be encountered. At a minimum,planners should consider:• terrorism;• war;• civil unrest;• vandalism;• labor strife;• fire;• explosion;• extreme weather, including wind,

thunderstorms or a storm surge;• earthquakes;• slope failures;• structural collapse;• drought; and• accidents.

In addition, planners must consider thereliability of equipment, fuel and supplysources. For example, a foreign suppliercould fail due to civil war, terrorism orextreme weather. Can this risk be avoidedby negotiating preferential contracts thatrequire the supplier to guarantee deliveryof supplies or paying the increased costsfor supplies provided by others? A contrac-tor or owner must consider stockpiling,specifying alternatives, increasing securityor utilizing alternate transportation toshore-up supply lines.

LIST POTENTIAL DAMAGESAfter identifying the potential risks, plan-ners can list the possible damages. Forexample, a terrorist attack may topple

structural elements, injure workers, rup-ture gas lines and cause explosions.Planners must consider and analyze thesepotential scenarios from the most likelyto occur to the least likely, and then listthe damages that may result.

SET STEP-BY-STEP RESPONSESAfter listing the risks and damages, plan-ners can identify case-specific responses.For example, if a terrorist act causes a gasfire, the crisis plan can prescribe step-by-step responses. The plan may direct theteam to turn off the main gas valve, cir-cuit breakers or temporary power to avoidadditional fires, and then direct the teamto rescue the injured. The crisis plan alsomay warn the response team to sweep for

CRISIS MANAGEMENT—

THE ULTIMATE JOBSITE SAFETY ISSUEB Y B R Y A N C . J A C K S O N


A pre-job risk-assessment strategy can alert contractors to these and other worksite dangers.

[ S U R E T Y B O N D I N G : R I S K M A N A G E M E N T ]


terrorist traps when turning off valves to ensure more effective firefighting andrescue operations can occur.

ESTABLISH EMERGENCY RESPONSE TEAMSDisasters may occur throughout a widearea. In addition, terrorists could strikeafter a natural disaster has already deplet-ed police or fire resources. Accordingly, acrisis plan should require the company’spersonnel to be trained for emergencyresponse. Planners might survey employ-ees to determine their training levelsincluding:• search and rescue;• first aid;• CPR;• nursing;• paramedic training;• fire extinguisher use;• emergency extraction;• bio-hazardous handling;• radioactive materials training;• spilled containment training;• red tag training;• electrical engineering;• communications skills;• communications repair; and• computer repairs.

Emergency training must be up-to-dateand periodic drills should be carried out tosharpen skills. Drills often result in revisedplans, wiser strategies and better coping ifa real emergency occurs. Also, responseteams need easy access to multiple copiesof the plan in a disaster. Finally, multipleresponse teams should be formed in casesome of the team members are not avail-able or need to be rescued.

ANALYZE REDUNDANCIESIdentify primary and secondary urgentcare facilities. Alternative shutdown andsecurity procedures should be explored incase the primary shutdown and securityprocedures cannot be accessed. For sys-tems controlled by computers, manualturn-off or override systems should beconsidered and protected from terrorism.In addition, planners should place emer-gency supplies in various areas of a proj-ect to provide redundancies.

STOCKPILE EMERGENCY SUPPLIESPlanners should place emergency suppliesin various areas to provide easy access.Emergency supplies may include:

• hazardous materials suits;• back-up systems;• back-up communications;• rinse areas;• separate storage areas for volatile chemicals;• exit and danger signs;• containment equipment;• spill kits;• first-aid kits; and• emergency generators.

PLAN EVACUATION ROUTESPlanners should create evacuation routesand personnel accounting (check-out)systems and provide evacuation signs andemergency lighting. Primary and second-ary evacuation routes with strict check-out systems allow planners to know whois left in the damaged structure. Considercall-in or web-based check-out systems,but remember a disaster may shut downtelephone lines.

A check-out system allows rescueteams to determine who might still beinside burning or collapsed structures andavoids placing emergency teams at risk tosearch for employees who have already leftthe building.

SET UP INFORMATION PROCEDURESDissemination of information on a timelybasis is critical. Planners should designateauthorized personnel to disseminate infor-mation. Such spokespersons should provideaccurate, up-to-date information regardingthe crisis, response and injury status.

Preplanned statements can assistspokespersons in gathering their thoughtsin times of crisis. Such preplanned state-ments avoid admitting liability for the dis-aster. Company counsel should assist indrafting such text.

PROVIDE A PROJECT RESTORATION STRATEGYOnce the crisis stabilizes, strategiesshould be employed to restore the con-struction project quickly. If significantinjuries or loss of life occur, specializedcounseling and a period of mourning isessential to begin the healing process.

Careful documentation of the dam-ages, including photographs, video andreports, by reliable parties is necessary topursue insurance and relief agency claims.In cases of death or injury, legal counselshould be consulted immediately, and the Occupational Safety and HealthAdministration (OSHA) must investigateall injuries or deaths. Counsel shouldretain independent consultants to pre-serve evidence and evaluate the causes ofvarious injuries or damages. These reportsmay be kept confidential, if necessary.

Restoration procedures should beranked from the most critical to the leastcritical. Planners should provide step-by-step processes for turning off all equip-ment, checking all utilities for damage andthen energizing equipment one piece at atime to avoid damage.

Emergency generators may be required.Many emergency planners negotiate gen-erator supply contracts in advance to keeptrack of costs. Engineers can evaluate safe-ty measures before construction resumes.Also, security personnel can solve securitybreaches that may have allowed terrorismto occur.

If a widespread disaster occurred,alternative communications through cellor satellite phones may be critical torestoring the project and disseminatinginformation.

It is never too early to start planningfor a potential crisis. Various emergencyresponse agencies that might assist in cri-sis planning include fire departments,health departments, the U.S. Departmentof Agriculture, OSHA, police/sheriffdepartments, security consultants, utilitycompanies and legal counsel.

In short, the time to create and imple-ment crisis management plans is now, wellbefore any actual crisis occurs.

Jackson is a partner in the Los Angeles office

of Allen Matkins Leck Gamble & Mallory. For

more information, call (213) 955-5575 or email

[email protected].

Contractors and owners must devise contingency

plans in case of war,terrorism,earthquakesand extreme weather

that can destroy projects or their

supply lines.

[ S U R E T Y B O N D I N G : R I S K M A N A G E M E N T ]

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