Turning Construction Red Flags into Opportunities

By Bill Teed | December 2, 2011

The role of an agent or broker as a trusted advisor to contractor clients is more important than ever given today’s challenging business environment. One of the many ways you can add value to your client relationships is to identify conditions or practices that often, from a risk management standpoint, turn problematic over time. These warning signals are wide ranging, but well worth the effort to identify and address as early as possible.

Watching for Red Flags

Although the weak economy has impacted nearly all contractors, the duration of the current difficult conditions makes it all the more critical to frequently address your client’s financial health. Some red flags are obvious, such as negatively trending margins, operating losses, low cash reserves, slower collection patterns and rising debt. Other, less obvious indicators, such as more frequent use of or maximizing credit lines, a higher percentage of jobs underbid, shorter terms on account payables, an increase to unfunded pension liabilities, or a change of independent auditor, all may warrant further investigation.

Of course, a contractor under financial pressure must react in ways that he or she believes are in the best interests of the business. Depending on the degree of urgency, the reaction could be subtle or dramatic. Changes that appear to be reasonable given the circumstances still need to be examined to make certain they are consistent with the organization’s overall risk management plan, and that all contingencies have been analyzed. Think of such changes as additional warning signals that serve as an opportunity to provide valuable risk management assistance to your client.

Recognizing red flags in a contractor’s business practices is the first step. Connecting the dots and finding ways to provide helpful guidance is the critical next step. Three examples demonstrate some of the opportunities agents and brokers can watch for.

New Geography

Contractors may expand geographically to pursue business if work is lacking in their traditional markets. What services can you offer regarding various aspects of operating in a new territory, such as working with unfamiliar labor or subcontractor pools? How familiar are you with the jurisdictional issues in the new territory, particularly if the expansion involves a new state? Will your client’s current contractual risk transfer program work well in the new state without modifications? What changes, if any, are needed? Does the new state have unique legislation of which your client is unaware? A prime example of this is the contractor based in Vermont or Pennsylvania who bids work in New York for the first time. Sections 240 and 241 of New York’s Labor Law in many cases impose absolute liability on contractors for certain injuries to employees. How can you prepare or educate your client to help them weigh the options and to operate successfully should they ultimately decide to proceed? There are many other examples of unique territorial issues such as disparate anti-indemnity statutes, widely varying construction defect environments and diverse litigious conditions. Your guidance on navigating the issues associated with a new territory can strengthen your client relationship.

Different Projects

Similar to contractors who move into new territories, some construction businesses may shift to different types of projects, even though they may be outside their area of expertise. For many contractors, it is normal to transition back and forth between types of work depending on where the best profit opportunities emerge. These contractors have a history of operating in such a manner and are successful at it. In other cases, however, financial pressures often prompt a contractor to pursue jobs for which they are ill-prepared. It’s easy to imagine, for example, the potential hardships for a contractor that typically performs only residential driveway paving to transition into high volume street and road construction. Similarly, a residential plumbing contractor that attempts to transition into commercial fire sprinkler installation may encounter unexpected difficulties. Even when the economy is healthy it is often difficult to successfully shift into new operations. Many of us can recall the number of commercial contractors that entered the residential building market during the height of the housing boom, yet lacked the necessary expertise and ultimately failed. It is critical that you work closely as a trusted advisor with your customer if he or she is considering a new category of work.

Reduced Resources

Financial pressures might also cause some contractors to lose focus on various aspects of their overall risk management program. While it is natural to reduce expenses in times of difficulty, there are some expense savings that may not be in the best interests of the company. Look for the warning signals and help your client weigh the pros and cons of the proposed changes.

A good example is when the firm cuts back on safety management. No company wants to compromise the safety of their employees or the public, but there are usually consequences when the focus on safety becomes a lower priority. When less attention is paid to jobsite conditions, accidents are more likely occur. A crew that senses a more relaxed policy on the use of personal protective gear may make unwise choices. Inconsistent drug and alcohol policy enforcement can lead to higher accident rates and OSHA citations. Higher frequency rates will impact the experience modification and increase the chance of a severe injury. Curtailment of training and new employee orientation programs can be particularly dangerous, especially considering that on average, employees in their first year on the job have a higher incidence of injuries than those with more tenure.

Resources for Agents

Agents who spot red flags and identify opportunities to guide their customers have access to a variety of resources to help them increase their ability to offer effective risk management advice. In addition to insurance and construction industry associations that offer materials, a carrier that specializes in providing coverage and services for the construction industry can be an agent’s key ally.

For example, a construction claims professional can share their state specific jurisdictional expertise on a variety of issues and requirements. A construction underwriter can review risk created by contractual language with an eye to its effect across multiple jurisdictions. A construction risk control consultant can offer practical consultation on specific projects or worksite environments. Agents can rely on these resources and also link their customers directly with information that carriers offer, such as safety planning templates, online safety courses and more.

Agents and brokers are well positioned to understand the changes that contractors are going through as the business environment evolves. These changes offer the agent an opportunity to provide risk management guidance and strengthen their relationship as a trusted advisor to their customer.

Teed is president of Travelers Construction.

About Bill Teed

Teed is president of Travelers Construction.

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