By John Thorpe
The Canadian construction industry has been remarkably resilient over the past 18 months and has enjoyed a surprisingly low number of contractor defaults notwithstanding the headwinds brought on by the pandemic. As we emerge from the pandemic, the surety industry is placing greater emphasis on a contractor’s ability to navigate and, in some cases, absorb unforeseen costs due to the challenges that remain. Risk mitigation has never been more important.
Scaling up coming out of the pandemic:
Rapid growth by taking on too much work too quickly can place a tremendous amount of stress on working capital as the business scales up. Contractors need to have a firm understanding of the business’s financial capacity and what cash is required to execute the backlog. Things to consider include:
- Access to working capital like cash and credit facilities to cash flow the backlog;
- Access to skilled own forces labour and qualified trades;
- Access to the equipment to execute the work. If more equipment is needed, how will it be acquired (purchased or leased) and what does this do to company financial metrics?
- Access and timely delivery for materials required to execute the work;
- Understanding the financial position of the project owners and availability of project funding, if doing private work;
- Sticking to what you know by being selective in the work being targeted;
- Understanding the obligations being entered into by reviewing the contracts thoroughly.
Material and equipment price inflation driven by supply chain concerns:
Dealing with material and equipment price escalation is not a new issue for contractors but seems to be quite erratic today. The pandemic has shuttered supply chains globally, causing delays in construction projects while also creating uncertainty for contractors when pricing and submitting a tender package. Material and equipment vendors are also struggling to provide pricing and quote commitment windows are becoming shorter as a result. Lengthy project awards can further compound this problem. Ways to risk mitigate against supply chain concerns include:
- Thorough review of order confirmations and purchase order and subcontracts and involve a construction solicitor in the geographic area of project, if necessary;
- Be aware of penalties for late completion or overreaching indemnity provisions;
- Source common materials in bulk if working capital, credit facility capacity and available storage areas allows for it;
- Establish strong relationships with lenders and establish temporary increases in short-term financing to assist with material procurement;
- Work with common vendors for cost certainty;
- Negotiate with project owners for the inclusion of material cost escalation language in the contracts;
- If all else fails, contractors should make best efforts to price in the risk of material cost uncertainty or use that as basis to negotiate more reasonable escalation contract terms.
Shortage of skilled labour:
As work programs ramp up, the need for skilled labour intensifies. A skilled labour force on a project can be the difference between a successful project and a project fraught with deficiencies, causing delays in achieving substantial completion, incurring damages due to late completion and increases in insurance claims arising from poor quality and craftsmanship. Contractors never have enough profit to build things twice!
Slowdown of Government assistance:
Many businesses survived the early stages of the pandemic with the assistance of government programs such as the Canadian Emergency Wage Subsidy (CEWS). As these programs wind down later this year, there will be companies that suffer financial challenges, and we are likely to see an increase in contractor defaults as a consequence. Companies that find themselves in a fragile state will need to pivot quickly and adapt to the new circumstances.
New Bond Forms:
The surety industry continues to adapt and work with industry partners to provide bond wordings that respond to specific needs of the industry and demands of the current market conditions.
Understanding these current issues will give you confidence when making decisions around work selection, material procurement and staffing. For further information about changes in the surety industry post pandemic, please reach out to one of the surety underwriting experts at Trisura Guarantee Insurance Company.
The views expressed in this article are exclusively those of the authors; they do not necessarily reflect the views of Trisura Guarantee Insurance Company, its affiliates or partners.