IQ Spring 2012: The Conference Issue - (Page 8)

Boost your IQ// What do Surety Providers Think About YOU? By Susan hines WheN fMI’s secoNd annual Surety Providers Survey hit my in box in December, I almost didn’t open it. Anything subtitled “Continued Difficulty for Construction Markets” isn’t welcome news. It was clear then that neither the American Jobs Act nor the National Infrastructure Bank were likely to become law. But I read it, and I’m glad I did. Surety providers play a significant role in the construction industry and offer an interesting perspective. The ability to obtain surety credit is key to a construction firm’s financial well-being. Taking a look at what surety providers had to say about the financial health of the construction industry was revealing. Cautious by nature, most surety providers don’t expect the nonresidential construction market to grow until the first or the second half of 2013. Only five percent of survey respondents said that they are seeing an upswing right now. Almost 20 percent feel that conditions may not improve until 2014. When asked how well positioned surety providers believe contractors are, 90 percent said their contractor clients are “tentatively positioned” with “some exposure” to stable or growing markets. Just five percent stated that clients were either poorly positioned or well positioned. What do surety providers see as the biggest mistakes firms have made under current market conditions? More than 50 percent cited “failure to manage overhead” or “straying from core competencies.” Yet more than 40 percent of those surveyed weighed in evenly on these common errors: “inadequate subcontractor qualification,” “acceptance of inappropriate contract terms” and “maintaining inadequate financial position.” Intrigued, I asked one of the report’s authors, Timothy R. Sznewajs, a managing director with FMI Corporation’s Investment Banking Practice, if surety providers saw design-build differently. Because the survey didn’t distinguish between delivery methods, Sznewajs could only answer anecdotally. “In general surety providers are more comfortable with design-build,” he says. “Key industries and key owners pioneered the delivery method, and almost everything the federal government does is design-build. There are adequate contract forms and case law to support their ability to provide surety.” Sureties are leery of IPD, Sznewajs adds, because the risk sharing and responsibility is less clear, the contract form is not established and the case law virtually nonexistent. The survey made clear that providers are concerned about risks posed by the prevailing low-bid environment. Noting the severity of this recession, which at 24 to 36 months is already one of the most extreme cycles the construction industry has experienced, Sznewajs says surety providers do look at procurement methods. “Sureties are more sensitive to the method of procurement and care now more than before because, knowing the dynamics, they understand that when owners rely predominantly upon low-bid processes to choose their contractors, the risks of bad projects go up,” he explains. The report, which you can find at fminet.com, concludes: “Successful projects and a healthy base of contractors portend well for the entire construction industry. If the continuing recession results in increased surety losses due to poor or uncompleted projects, it will be a loss for the market and create further instability, thereby extending the recovery. However, if the surety industry remains financially sound and maintains its current level of underwriting discipline, it can catalyze the recovery and, as a result, facilitate the healthy growth of the construction marketplace.” SUSan hInES IS DBIa’S ManaGInG DIrEctor of pUBLIc rELatIonS/InforMatIon anD IQ ’S EDItor-In-chIEf. ShE ovErSEES thE InStItUtE’S ELEctronIc anD prInt coMMUnIcatIonS, aWarDS proGr aM anD MEDIa rELatIonS. 8 spring//2012 the quarterly publication of the design-build institute of america http://www.fminet.com

Table of Contents for the Digital Edition of IQ Spring 2012: The Conference Issue

IQ Spring 2012: The Conference Issue