Surety Bond Quarterly - Summer 2017 - 12

Feature

Mitigating the Hidden Risks in the

"New Normal"

Construction Environment
NASBP White Paper

BY THOMAS C.
SCHLEIFER, PH.D.

12

THE CONSTRUCTION INDUSTRY, high risk
to begin with, is operating in a new postrecession landscape, characterized by
tighter margins and serious labor shortages
with less room for error. The unprecedented
market downturn has weakened some
construction organizations to the extent
that they may have difficulty financing the
growth that comes with market recovery,
which, in turn, increases the potential for
business failures and contract defaults.
Now more than ever, owners, contractors and designers need to increase risk
awareness and risk protection. They
should be concerned about the fact that
construction business failures are far
worse during market recoveries than during market slowdowns. At the beginning
of a downturn the balance sheet blossoms
as old receivables continue to come in and
less money goes out for job costs when
less work is performed. The opposite
occurs during growth, which eats cash,
when spending for current work exceeds
money coming in from the lesser amount
of backlog. The sustained downturn has
financially weakened some companies
to the point that they will not be able to
finance their increased workload. When
this occurs, it is possible for contractors to
"cash flow" themselves out of business.
There is risk in any commercial transaction, but the construction industry has
more than its fair share. Much of the risk
in the building process is poorly defined
and often misunderstood, with considerable ambiguity as to who is responsible
for it. Designers avoid it, owners prefer to
pass it along and contractors absorb it. To
contractors, risk is not a dirty word. After
researching the causes of contractor failure
for more than thirty years, I have uncovered a noteworthy truth: The assumption
of risk is part of every successful contractor's DNA.

SURETY BOND QUARTERLY | SUMMER 2017

THE ASSUMPTION OF RISK IS
PART OF EVERY SUCCESSFUL
CONTRACTOR'S DNA.
Today's construction risk environment is
dramatically different than it was even ten
years ago, and the attendant risk factors are
mutating just enough to be almost unrecognizable. The inherent construction risks
of changes in project size, type, geographic
area, key personnel and/or managerial
maturity were documented in my first book,
Construction Contractors' Survival Guide
(John Wiley & Sons), 27 years ago and are
recognized by most construction professionals. The risks evolved over time and
were updated in my latest book, Managing
the Profitable Construction Business (Wiley
RSMeans, 2014). However, there are developments in this new environment that will
appreciably increase the risk of project and
contractor failure. The obvious risks are
skilled labor shortage, growth in general
and subcontractor risk:
* Shortage of Skilled Labor Risk - Following
the construction market collapse, a huge
number of workers left the industry. Now
that the industry is starting to grow again,
companies that are short on skilled labor
are already straining to complete quality
work on time and on budget.
* Company Growth Risk - Since the
recession, the market has begun to grow
again. At such a time, growth is always
welcome and rarely seen as a major
cause of impending failure. However,
research reveals that, when a construction company expands in size, it requires
careful management decisions to reduce
the risks inherent in the change. Growth
itself impacts failure rate and the potential for financial distress.
* Subcontractor Risk - Subcontractors are
a fundamental part of the construction



Table of Contents for the Digital Edition of Surety Bond Quarterly - Summer 2017

NASBP Upcoming Meetings & Events
2017–2018 Executive Committee
From the CEO: Bringing Summer Heat: A Rundown of “Hot” Stuff in the Evolving World Surrounding Surety
Howard Cowan—Building on a Solid Foundation
Mitigating the Hidden Risks in the “New Normal” Construction Environment
Acting Director of the U.S. SBA Office of Surety Guarantees
Drones Take Flight in the Construction Industry
2017 AIA Contract Documents: Selected Key Changes
NASBP to Release Continuing Education Course: Joint Ventures in Construction
How Can Construction Contractors Expedite Payment on Federal Contracts?
Insurtech for Surety: The Future Is Closer than You Think!
Index to Advertisers
Surety Bond Quarterly - Summer 2017 - Intro
Surety Bond Quarterly - Summer 2017 - cover1
Surety Bond Quarterly - Summer 2017 - cover2
Surety Bond Quarterly - Summer 2017 - 3
Surety Bond Quarterly - Summer 2017 - 4
Surety Bond Quarterly - Summer 2017 - 5
Surety Bond Quarterly - Summer 2017 - 6
Surety Bond Quarterly - Summer 2017 - 2017–2018 Executive Committee
Surety Bond Quarterly - Summer 2017 - 8
Surety Bond Quarterly - Summer 2017 - From the CEO: Bringing Summer Heat: A Rundown of “Hot” Stuff in the Evolving World Surrounding Surety
Surety Bond Quarterly - Summer 2017 - Howard Cowan—Building on a Solid Foundation
Surety Bond Quarterly - Summer 2017 - 11
Surety Bond Quarterly - Summer 2017 - Mitigating the Hidden Risks in the “New Normal” Construction Environment
Surety Bond Quarterly - Summer 2017 - 13
Surety Bond Quarterly - Summer 2017 - 14
Surety Bond Quarterly - Summer 2017 - 15
Surety Bond Quarterly - Summer 2017 - 16
Surety Bond Quarterly - Summer 2017 - 17
Surety Bond Quarterly - Summer 2017 - 18
Surety Bond Quarterly - Summer 2017 - 19
Surety Bond Quarterly - Summer 2017 - Acting Director of the U.S. SBA Office of Surety Guarantees
Surety Bond Quarterly - Summer 2017 - 21
Surety Bond Quarterly - Summer 2017 - Drones Take Flight in the Construction Industry
Surety Bond Quarterly - Summer 2017 - 23
Surety Bond Quarterly - Summer 2017 - 2017 AIA Contract Documents: Selected Key Changes
Surety Bond Quarterly - Summer 2017 - 25
Surety Bond Quarterly - Summer 2017 - 26
Surety Bond Quarterly - Summer 2017 - NASBP to Release Continuing Education Course: Joint Ventures in Construction
Surety Bond Quarterly - Summer 2017 - How Can Construction Contractors Expedite Payment on Federal Contracts?
Surety Bond Quarterly - Summer 2017 - 29
Surety Bond Quarterly - Summer 2017 - 30
Surety Bond Quarterly - Summer 2017 - 31
Surety Bond Quarterly - Summer 2017 - Insurtech for Surety: The Future Is Closer than You Think!
Surety Bond Quarterly - Summer 2017 - 33
Surety Bond Quarterly - Summer 2017 - Index to Advertisers
Surety Bond Quarterly - Summer 2017 - cover3
Surety Bond Quarterly - Summer 2017 - cover4
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