construction costs, insurance, & risks surviving in an expanding market pete kelley, vp –...
TRANSCRIPT
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• Payment & Performance Bonds
– Current Construction Market• Risk down• Life is Good …
•Right???
Bonding & Insurance• Payment & Performance Bonds
– 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
Bonding & Insurance• Payment & Performance Bonds
– 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
Bonding & Insurance• Insurance
– 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
Bonding & Insurance• Insurance
– 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
Nature of Construction Costs
• Labor– Cost Escalation Factors
• Competition from other contractors• Competition from other industries
Nature of Construction Costs
• 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
Nature of Construction Costs
• 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
Nature of Construction Costs
• 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
Nature of Construction Costs
• 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%
Risk Contingency Evaluation
• Project Identification
• Owner Identification
• Internal Labor Supply
• Material Cost & Supply Issues
• Subcontractors
Risk Contingency Evaluation
• 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
Risk Contingency Evaluation
• Project Identification– Select only those projects that fit your
skill set and do not force inordinate risk to your company
Risk Contingency Evaluation
• 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
Risk Contingency Evaluation
• 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
Risk Contingency Evaluation
• Subcontractors– Be selective with subcontractors– Consider bonds on subcontractors with
limited work experience, large scope of work, or technical scope