So I think the hopes of a recovery beginning in early 2010, or maybe even 2010 at all, is fading fast.  I was talking with a few contractors and bankers, and so far, no one is seeing any indication of a market correction.  Seems we are all waiting for a spark in the economy that is going to kick thinks into gear.  Is anyone seeing some exciting trends that are leading toward an optimistic 2010?  Head down, work hard, and make your own luck – the rally cry for 2010!

Please share any of your ideas on how to make 2010 a successful year.

It is likely many firms are going to be showing either minimal profits and/or losses this coming year end. How is your surety going to view these results?  I think it comes down to the nature of the results and what you did to get there. 

If you picked up a lot of work with minimal profits I think you might have an issue.  Those projects will last for some time and continue to impact results while causing your surety pause on future work you want to pursue.  If your results are due to lack of revenue the positive is you don’t have baggage to deal with entering the new year.  In my opinion the surety will look at this business decision more favorably as your ability to pick up some work at the right margins will allow you to regain your standing quicker. 

End of the day I think the firm with minimal profits to a loss but little work will be in much better shape than the firm saddled with low margin work over the long haul.  Good luck out there.

We have noticed a significant uptick in sureties questioning 3rd party guarantees, joint ventures, and significant subcontractor relationships to federal construction.  With the concern over fronting we have noticed sureties requesting disclosure statements be presented to the contracting officers stating clearly the relationship between the  entities.  While this should not be of any concern to a legitimate business concern it is interesting how quickly this trend developed in the surety industry.  With work being hard to get and everyone looking for an advantage the surety community just wants to make sure they don’t get sucked into a questionnable dealing.  Has anyone had these disclosure statements adversely impact their business?

Seems the island of choice in topics lately is Guam.  With the volume of construction work anticipated to be procured on the island in the coming decade, everyone seems to be talking about it.  Of course talking about it and actually getting there and doing the work are two different things.  Obtaining labor, shipping material and equipment, and managing such a remote job site surely will post construction issues and potential surety issues.  If you are one of the many looking at this venture, put together a strong plan and team and I would think start slow to work out any bugs in the process.

It seems inevitable that we will be impacted by inflation at some level in the near future.   Considering the small margins some contractors are earning to win construction projects and the potential length of these contracts, it seems inflationary pressures are one more element that may turn small profits into damaging losses.  What are you doing to hedge against inflation and the potential impacts it will have on your long term contracts?

We are seeing increased requirements for subcontractor bonding by general contractors.  Only a year ago we saw subcontractor bonding requirements only on subs with contracts in excess of $250,000 or if they made up the critical path of the project.  Today we are hearing of generals requiring all subs with contracts as little as $50,000 being required to bond. 

In talking with some generals this presents an interesting dilemma.  Jobs are so competitive these days with profit margins being slim that bonding a vast majority of subcontractors can actually have a negative impact on securing the work.  On the flip side, with so many new subcontractors entering the public arena and other subcontractors being essentially desperate to win work to stay alive, it is risky to list a low bid subcontractor you do not know without requiring them to bond. 

What is the right balance of bonding to remain competitive and mitigate risk?  There is no right answer as this depends on your business philosophy.  However, bonding the critical path always makes sense in my opinion.  The peripheral trades, unless they are specialized, my not be as necessary.  For these trades, replacement contractors may be easily obtained without impacting job performance and profitability.

I have been getting a few calls from clients lately looking for the surety company personnel that handle takeover work of failed firms.   Seems a lot of people are starting to get the feeling the time has come when the low ball bids are going to come back and haunt the bidders.  We have begun to see some stress in the marketplace and I would expect this to rapidly increase during the second half of this year.  To much job borrow going on which makes firms count on getting the next job to survive.  With the competition today this strategy is only going to last so long.  Long run this is probably good news as it will weed out the firms the weaker firms and leave behind healthier, better run companies.

Interesting times we are going throuht.  While not a hot topic in the surety world more attention is being paid to the banks construction firms use.  With funds easily exceeding FDIC insured amounts the concern is less about maintaining lines of credit and more about waking up some morning to find out you just lost hundreds of thousands of dollars because your bank shut down and you were over FDIC limits. 

Another real concern is the banks your general contractors are using.  I’m sure your confident you work for strong GC’s.  Well hopefully those general contractors are also using very strong banks and taking measures to protect the large progress payments they receive and hold.  If something were to happen on that end the financial impact on subcontractors could be devastating. 

Keep an eye on your institutions and take precautions to protect your money.  If possible, and we know it is hard, make sure your progress payments are being held in a strong institution as well.

We have been witnessing a significant increase in bond requests on bank financed commercial construction projects.  These projects have been as little as $5 million in construction value.  The tricky part is the banks don’t seem to care if the developer or contractor being hired posts the bonds.  This has led to some complicated situations of trying to get completion bonds done for developers and also trying to qualify some contractors for performance and payment bonds that have never had to worry about this prior. 

If you are a developer or developer-builder, be aware that the market for a completion bond is limited, and it will take some time to underwrite the process.  Don’t wait until the last minute to begin engaging a broker and surety in the process.

If you are a general contracting pursuing commercial work that is typically not bonded but bank financed, then keep your eyes open and ask if the bank is requiring any sort of bonding.  If you have not bonded before, the volume of information requested by the surety will be significant and it will take some time for the surety to sort through your information.