Construction Costs, Insurance, & Risks Surviving in an Expanding Market Pete Kelley, VP – Florida Operations Curtis Long – Senior Project Manager

Construction Costs, Insurance, & Risks

Surviving in an Expanding Market

Pete Kelley, VP – Florida Operations

Curtis Long – Senior Project Manager

Presentation Summary• Bonding & Insurance

• Nature of Construction Costs– Labor– Materials– Equipment– Subcontractors

• Risk

• Contingency Evaluation

Bonding & Insurance• Payment & Performance Bonds

– Current Construction Market• Explosive Growth• Profits Up

Bonding & Insurance• AGC

– Construction spending in March ’06 set a record for the 8th straight month - $1.2 trillion seasonally adjusted

– Construction spending was 9.2% higher in first quarter compared to ’05

– 40% increase in multi-retail centers/”Big Box”– Public sector 1st quarter results

• Educational – 14%

• Highway & Street – 7.7%

• Sewage & Waste disposal – 28%

Bonding & Insurance• Superior Construction Growth

• 2001

• 2002

• 2003

• 2004

• 2005

• 2006


– Current Construction Market• Risk down• Life is Good …

•Right???


– Then Why Are So Many Companies Struggling???

– Jan ’01 to Sept ’05 the surety industry sustained losses exceeding $11.9 billion

Bonding & Insurance• Why Contractors Fail

– Unrealistic Growth - Expansion in Volume, Type of Work or Geography

– Performance Issues - Lack of Experience in Job Size, Complexity or Type

– Character Issues - Problems Which Distraction Key People: Divorce, Senility

– Accounting Issues - Inadequate Internal Accounting; Costs Not Posted Timely.

– Management - Weak Management at Upper or Field Level.

– Large Project Concentration– Non Construction Activities - Money & Time– Geographic Spread - Unfamiliar Subs, Labor– Inadequate Profit Margin – Subcontractor Problems– Unapproved Change Orders– Other - Owner Financing, Excess Equipment, Insurance\

fidelity

Bonding & Insurance• Bid Bond - Guarantees that if you are

low or successful bidder you will enter into a contract and execute the required performance and payment bonds.

• Performance Bonds - Guarantees that you will perform the obligation as require by the contract in accordance with the plans and specifications.

• Payment Bonds - Guarantees that all vendors, and laborers will be paid

Bonding & InsuranceHistorical Surety’s Assessment 3 C’s

• Character - Morals and Ethics

• Capacity - Performance Record, Equipment, Credit, Management continuity, etc

• Cash\Capital - Working Capital,

Net Worth, Debt, Over and Under-billings

Bonding & Insurance• Surety Benchmarks

– Working Capital 3%-10% of Aggregate– Net Worth 5%-20% of Aggregate– Gross Profit 5-10%– G&A Expenses 4%-8%– Net Profit 1%-2%– Debt to Equity < 3:1

Bonding & Insurance

• Managing the Surety Relationship– Provide Standard Information Timely

– Discuss Strategy - Silent Partner

– Clear Specs - Reconcile All Schedules With Financial Statement & Educate on Risk Evaluation

– Provide In-depth Data on Projects and Organization

– Prepare Business Plan & Budgets

– Minimize Job Profit Fluctuations

– Project 100% Complete & Underbilled Red Flag

– Open Projects GPM Higher than Completed Jobs

– Underbillings > 25% of Working Capital

– WIP does not Reconcile with Income Statement

– Educate your Surety


– What Do Sureties Focus• Expansion Risk• Subcontractor Default Exposure• Contract Duration• Warranty & Maintenance Periods• Liquidated Damages Levels• Consequential Damages Provisions• Materials Escalation/Industry Inflation• Bond Forms• Residential Projects• Continuity Planning/Ownership Transfer

Bonding & Insurance• Insurance

– General Liability– Workers Compensation– Automobile– Builder’s Risk– Professional Liability– Umbrella

Bonding & Insurance

• Insurance– General Liability

• Must have policy• Market stable for companies with good loss

records• Do not be under-insured

– Workers Compensation• Safety First is not just a catch slogan• For every $1 in direct WC costs you will

experience an additional $ xx in indirect costs• e.g. – a accident with $25k in medical costs will

cost you approximately $100k


– Automobile• Company vehicles are a significant

risk/exposure• Non-business related travel• Interaction with the traveling public

– Builder’s Risk• If it is not required contractually – do you carry

it?• Premiums are significant with large deductibles


– Professional Liability• Relative newcomer to the insurance portfolio of

contractors• Necessity brought on by the proliferation of

design/build work• Necessary even if engineering done by a

consultant• Necessary even if “Design/Engineering” is not

performed by the contractor or construction manager

Nature of Construction Costs

• Labor– Quantity

• Single greatest limiting factor to growth is the availability of skilled labor

– Quality• As construction professionals we must train

younger workers and promote our industry


• Labor– Cost Escalation Factors

• Competition from other contractors• Competition from other industries


• Materials– Cost of materials has historically been

stable– Vendors typically would hold pricing for the

duration of a contract– Currently, vendors won’t hold pricing for

more than 30 days


• Materials– Steel

• Chinese demand, Buy-American clause

– Concrete• Cement & Aggregate shortages

– Asphalt• Shortages across the board – aggregate,

liquid asphalt,

– Dirt• Widespread development has driven land

costs to the point that it is no longer feasible to put a borrow pit on real estate near a population center


• Equipment– Steel– Technology– Labor– Rubber– Demand


• Subcontractors– Transfer of risk does not eliminate– Consider all factors when selecting subs

• Work history together• References• Risk associated with the scope of work• “How low are they” – consider a bond


• Market Analysis – ENR Producer Price Survey

• Ready Mix Concrete – up 11.9%• Aggregates – up 9 %• Cement – up 14.9%• Asphalt – up 19%• Construction Machinery – up 5.4%• Labor – up 3.4%

– Local Conditions June ’03 – Dec ‘05• Ready Mix Concrete – up over 50% since

June ’03• Labor – up 15.7%

What Does it All Mean• RISK !!

• RISK !!

• RISK !!

Risk Contingency Evaluation

• Project Identification

• Owner Identification

• Internal Labor Supply

• Material Cost & Supply Issues

• Subcontractors


• Owner Identification– All owners are not the same

• Focus estimating efforts on projects with owners that foster a profitable relationships

– Owners do not stay the same• Corporate/agency attitudes often reflect

those of top management• Relationships can and do change with

changes in upper management• Relationships can change with geographic

movement


• Project Identification– Select only those projects that fit your

skill set and do not force inordinate risk to your company


• Internal Labor Supply– Analyze current projects and upcoming

work – Consider contingency for projects with

extended durations, i.e. – greater than 12 months

– Projects in remote areas should have special consideration given to availability of resources and prevailing wage


• Material Cost & Supply Issues– Material supply can no longer be taken for

granted– Contingencies and escalations must be

strongly considered for the following cases• Projects over 4 months in duration should have

significant consideration for escalation• Materials that may be susceptible to supply

shortages should have consideration given to stockpiling materials

• Projects in remote, less populated areas require particular attention with regard to material supply


• Subcontractors– Be selective with subcontractors– Consider bonds on subcontractors with

limited work experience, large scope of work, or technical scope

Construction Costs, Insurance, & Risks

Surviving in an Expanding Market

Summary

Documents

Construction Costs, Insurance, & Risks Surviving in an Expanding Market Pete Kelley, VP – Florida Operations Curtis Long – Senior Project Manager