National Association of Surety Bond Producers

Critical Issues

The construction industry will experience the harsh effects of this economic turbulence within the next 18 to 24 months. Historically, construction lags behind downturns in the financial marketplace. The current backlog of work to be completed will deter any immediate direct financial stress.

In the coming 18 to 24 months, the construction industry will be subject to fierce competition in the procurement of work. Lack of work in the private sector will compel new entrants into the public works marketplace. More contractors pursuing fewer projects will place undue pressure on margins. Caution needs to be taken when entering the public works marketplace, though. It has its own unique characteristics.

Along with the pressure of increased competition, the costs of basic construction materials such as asphalt, steel and concrete will continue to strain the contracting environment. The need to be sensitive to the volatility of the marketplace will require more attention and strategic planning.

Care needs to be taken to confirm that project financing is in place and guaranteed in both the private and public sector construction markets.

The current banking crisis causes no small amount of concern. At a time when the need for possible cash flow financing is needed, the big concern is whether the banking community will continue to support construction. Contractors need to be certain their bank sufficiently supports their financial needs over the next three years or longer. Contractors who have banking relationships built over time tend to be able to weather difficult financial times.

Current Trends

There are some new and innovative trends that will affect construction in the near- and long-term. Business Information Modeling (BIM) will continue to help streamline and improve the construction planning process. It behooves all parties to review, understand and embrace this form of modern communication.

Strong efforts are being made to improve and simplify the construction documents and processes. Further improvement in the wording and streamlining of construction contracts and bond forms such as ConsensusDOCS (http://www.consensusdocs.org/) will continue to improve efficiencies and profits.

The bundling of public projects is a disturbing trend. Super-sized public projects demand consortiums of contractors to bid on them, resulting in fewer bidders and less competition. Prosecuting work in the public sector in a balanced and equitable manner will result in better projects completed by numerous construction entities.

Looking Forward

We continue to counsel our customers on the prattles and pitfalls facing them in this difficult financial environment.

All indicators point to there being sufficient work in the pipeline in 2009.

Government Compliance

The federal government can adversely affect construction if budgets continue to be reduced and the work available continues to decline. If an economic stimulus is needed anywhere, it is in the construction marketplace.

Additional Insights

In the current economic environment, the surety product is more valuable than ever. Contractors who already have a surety relationship need to take full advantage of these advisers. For those who do not yet have a working surety relationship, now is the time to get started. Work with a professional surety bond producer who is willing and able to handle your needs. A list of professional surety bond agencies is available from the National Association of Surety Bond Producers (www.nasbp.org).

The economy will turn around eventually. To ride out this storm and be in a position to emerge successfully when the market recovers, contractors should tap the expert resources of a professional surety bond producer and underwriter to help them plan and control their operations.

Best Practices

The more sophisticated contractors are planning far ahead, keeping tight control on projects from job estimation to final completion and acceptance. Smart contractors are sticking to their basic disciplines and not pushing the envelope with their operations. They are also keeping a close control on costs. Savvy contractors are reviewing their levels of general and administrative expenses on an ongoing basis, as these can be areas where net worth and liquidity can be decimated.

Tags: 2009 January Issue , Executive Insights , Professional Services Executive Insights , State of the industry