Construction Surety and Insurance –
Stability Withstands Scrutiny

by Marty Hoffey

These past 18 months have seen significant changes in the construction industry. Economic factors, world events, skilled labor avail- ability and financial markets all have affected the way contractors, subcontractors and industry suppliers conduct business.

Surety and insurance support to construction companies has undergone a change not seen since the recession of the 1980s. Due to recent economic difficulties, bonding and insurance companies are reevaluating and significantly reducing their willingness to support construction industry clients as they have in the past--some by as much as 80 percent. This has caused many firms--both general contractors and subs--to lose their relationships, and it has forced them into the open market to attempt to secure bonding and insurance coverage.

In order to retain the full support of surety and insurance providers, general contractors must prove their financial stability more stringently than before. Surety and insurance providers look for what they call the "Four C's"--character, continuity, capital and capacity. From their point of view, a contractor that demonstrates sound strategic planning, financial management, working capital requirements, core values, long-term perspectives, organizational structure and management expertise is a safe bet.

By the same token, responsible general contractors have adopted a more formal pre-qualification process to select subcontractors. Typically, subs are required to provide financial statements, as well as bonds on all contracts exceeding a certain amount.

Owners also are taking a more educated approach when choosing a general contractor. In addition to project experience or local construction experience, owners are evaluating a company's history and financial strength, paying close attention to surety and insurance, as well as subcontractor bonding policies. While these criteria limit the number of qualified contractors, they help owners minimize risk and maximize opportunities for their construction projects.

Bottom line: though the situation seems critical at this point, and for many contractors it is critical, surety and insurance standards fluctuate with the economy. The expected economic upturn will improve the situation for our industry, but contractors with proven stability weather the storm.

Marty Hoffey is Director of Business Development at The Weitz Company. He can be reached at 913.696.9970, or by email at hoffey@weitz.com.