Competing in a Growing Market

By Doug Cauti, Liberty Mutual Insurance
Timothy Kania, Liberty International Underwriters
Roland Richter, Liberty Mutual Surety

After one of the longest downturns in living memory, the non-residential construction market is showing signs of recovery. As successful heavy and general contractors, subcontractors and project owners prepare for new opportunities, they’re updating risk management and surety programs to make sure they support potentially rapid growth.

These groups understand how such programs can help achieve strategic goals, such as smart growth in an expanding market. They know that these programs need to evolve as companies develop new strategies in response to changing market conditions. To do this, these firms should work closely with insurance agents, brokers and carriers to address the five challenges of the resurgent construction market that have the greatest potential impact on insurance and surety.

Managing these will help drive growth. Failing to address them may limit the ability to compete. Here’s a summary of those challenges.

Project owners and contractors appear to be shifting their focus from cost to value, as these groups increasingly select vendors based – in part – on the value they’ll add.

This is partially driven by the experience of owners who have taken possession of completed projects built by low-cost bidders. As a result, they’re realizing that while price will always be important, true cost over time – beyond the project’s construction and into its occupancy and operation – is the real measure by which they should select contractors, and those firms should choose subcontractors.

This shift has far reaching implications for the risk management programs of contractors, subcontractors and project owners, which will increasingly look to insurers, agents and brokers to help provide the coverage, loss control and claims management expertise needed to support the delivery of quality projects on time and budget.

The construction market has responded to this growing emphasis on value with renewed interest in four alternative construction approaches that emerged in the U.S. market over the past decade, each of which addresses the "you get what you pay for" reality of traditional design-bid-build.

These approaches – Integrated Project Delivery, Construction Management at Risk, Design-Build and Public Private Partnerships – are gaining greater acceptance. In fact, revenue at the top 100 design-build firms grew 12.9 percent to $103.89 billion in 2012, according to ENR. In addition, 49 states – including those with the largest construction markets, such as New York, California, and Virginia – allow the use of design-build in public projects. As the construction market rebounds, interest in these approaches will grow.

At their core, alternative approaches seek to deliver better quality projects by replacing the clear separation between owner, designer and contractor inherent in design-bid-build, where the project owner selects a designer to create plans; chooses a contractor to build that project; and the cost of mistakes are pushed to either the designer or contractor based on responsibility.

Each alternative – to varying degrees – takes a different approach. They require close partnership between these parties. Owners, designers and contractors partner throughout a project and are often committed contractually and financially to a risk and profit-sharing pool. When an issue arises, the focus is on finding the best solution, rather than looking for fault.

This blurring in the responsibility of each party has clear insurance and surety implications. For example, does a contractor now need professional liability, since she or he is contributing to design decisions? Likewise, does a designer now need to understand surety, since he or she is involved in construction decisions?

Today’s U.S. construction market is also becoming more international, attracting global design and construction companies, particularly for larger, more complex projects.

Design and construction resources from across the globe have been drawn to the rebounding U.S. construction market, particularly as other markets – from Spain to China – have weakened. As a result, international design or construction firms often compete against domestic contractors, or seek local GCs and subcontractors with whom to partner on a particular project.

Two simple actions can help local contractors compete in this dynamic market. First, the contractor should highlight for the project owner how his or her local experience and risk program will help deliver a quality project on time and cost-effectively. Underscore how the firm has addressed the most troubling local regulations, which may be little understood by international contractors. Imagine trying to work in New York City without understanding New York’s Labor Laws 200, 241(6) and 240(1).

Second, educate the project owner on the need to make sure that all bidders – especially foreign companies – have similar insurance coverages and limits.

If a local contractor or subcontractor chooses to partner with an international firm, he or she must understand the specific nature of that agreement and work with insurance agents, brokers and carriers to develop an effective risk management program, including transferring appropriate liabilities where possible.

Across the country, contractors, subcontractors and project owners are developing plans for growing in the rebounding commercial construction market. Three issues should be at the core of these plans:

Markets - Should these plans call for entering new geographic areas or types of construction (say, moving from infrastructure into commercial development), these firms should be aware of the corresponding insurance and surety implications. Each geographic area or type of construction has its unique challenges and insurance agents, brokers and carriers can help companies understand and manage these.

The same applies should growth plans call for work on projects that were shuttered during the recession. Restarting construction projects can raise a host of complex insurance and surety issues, particularly on jobs mothballed by other contractors, subcontractors or owners.

Today, those contractors and subcontractors who survived the recession may have fewer resources available to pursue new work. The bidding process can be expensive and lengthy, particularly for larger projects and those using alternative construction approaches. Making the final project team often requires years of concerted effort.

The current financial condition of contractors and subcontractors – including the ability to generate new business – can impact both insurance and surety, particularly as contractors and subs pursue joint ventures to minimize the cost of new business efforts.

Staff - The third critical area for growth plans involves staffing. To survive the recession, many contractors, subcontractors and project developers trimmed staffs, losing valuable experience. To compete effectively in today’s construction market, these groups need to rebuild this capability, and turn it into a competitive advantage.

The ability of a contractor, subcontractor and project owner to hire the best staff and partners – and to show how this helps deliver higher quality projects on time and under budget – will play a key role in winning new jobs and getting favorable rates for insurance programs and surety bonds.

Before the recession in the U.S. construction market, and as the economies of China, Brazil and other developing countries grew in excess of 10 percent per year, prices for construction commodities soared.

The price of steel, copper wiring and other key construction materials reflected global demand. Basic economics dictated that as the demand for these goods grew, so did prices. Remember how expensive steel, concrete and other commodities became? Unfortunately, that recently hired estimator or project manager may not. What happens if the commodity inflation factor used to bid a project falls short of actual price increases, especially if global demand picks up? This could significantly impact a project’s budget, delivery schedule and profitability.

If global demand does pick up, price may not be the only concern. Increasing demand may also lead to quality issues with key materials.

Insurance and surety programs will benefit from highlighting the ability of the project owner, contractor or subcontractor to accurately bid and manage projects, including plans for monitoring the global price – and quality – of materials.

The resurgent non-residential construction market provides a great opportunity for contractors, subcontractors and project owners. Succeeding in the new market requires – in part – these groups work closely with their insurance and surety agents, brokers and carriers to update these programs to help drive growth.

In fine tuning these programs, these teams should pay particular attention to the five challenges of the rebounding construction market that have the greatest possible impact on insurance and surety.

Doug Cauti is senior vice president and chief underwriting officer for Liberty Mutual Insurance’s Commercial Insurance construction unit. Timothy Kania is senior vice president of construction and energy for Liberty International Underwriters. Roland Richter is vice president, marketing and analytics, Liberty Mutual Surety.