Construction Contractors Build Momentum Again
July 15, 2014| Von Jim McMahon
Construction contractors are a growth business again in North America. The growth is being driven primarily by the private sector; through May 2014 office was up by 25%, commercial up 21% and residential up 17%.*
On the public side, finances are somewhat strained and the sector showed just over 1% growth.
A market-driven solution to public infrastructure gridlock includes private/public partnerships for mega projects adapted from global infrastructure projects; those partnerships are gaining momentum, plus President Obama is urging Congress to boost infrastructure funding.
The financial crisis had a long-lasting effect on a sector dominated by small businesses. The devastating drop in construction activity caused many contractors to fail, though the majority found a way to adjust their overheads and operations to a sustainable level.
Those that did survive the construction depression emerged as much stronger businesses from an operational and strategic perspective. However, the recent increase in construction volume has not allowed broad balance sheet recovery and so stress is still high.
The good news is that a lot of low-cost money is sloshing around since the financial crisis, and bankers seem to be getting used to taking a little risk again. That’s because the demise of structured credit requires lenders to retain more risk instead of passing it on to investors.
What can insurance companies do to grow along with the contractor segment? It’s probably best to start small if you are not already in the business, and expand with the contractors; local contractors that you know and have a good track record are usually a good bet.
In terms of risk management moves, we see General Contractors frequently asking for bonding or subcontractor default insurance, among other steps, to protect themselves from subcontractor failure.
Given the significant private sector construction growth, you can respond to demand by developing competitive contractor-oriented insurance products, including the surety bonds needed as a requirement to qualify to work on certain projects. Small contractors occasionally need performance and payment surety bonds, so learn how to write or place small contract bonds.
Many state and municipal contractor regulations include license and permit bond requirements as part of the licensing process (often outlined on the state or local website), so learn to write or place license and permit bonds. Bonds are often a critical element needed to support revenue growth for contractors and skill development in the bonding discipline can become a competitive advantage in the contracting segment.