Surety Bond Quarterly - Summer 2017 - 13

process and are subject to these
same market changes. Each subcontractor is critical to project success, so it only takes one to disrupt
the entire process, thus intensifying project risk.
There are other current industry
developments that impact business
and project risks:
* Capital Risk - Secured equipment
loans and unsecured working capital
lines of credit, as well as surety credit
for bid, payment, and performance
bonds, are vital to the growing construction enterprises. The length of
the market downturn has financially weakened some companies
and impacted their credit worthiness. A construction company may
show positive income on its financial statement, yet suddenly have a
financial crisis due to a lack of cash
and limited borrowing power. A considerable number of construction
companies exit the business yearly
because they run out of credit.
* Commodity Risk - Construction is
a custom service and product that
owners are beginning to think is
a commodity, which causes them
to believe that all construction
companies perform alike. This in
turn can cause owners to be less
discriminating about contractor
selection and to think price is all
that separates them. This is one of
the reasons profit margins are low
compared with the historic norms
of 10 and 20 years ago. When buyers of construction services believe
a product is a commodity, they generally expect to pay less.
* Contract Risk - In this highly
competitive new growth market,
contract terms concerning the
responsibility of each party to the
agreement attempt to shift risk in
varying, and sometimes unrecognizable, directions. At the same
time, case law (court rulings concerning construction disputes)
seem to further cloud the issue of
which party is responsible for what.
* Change Risk - When an organization expands in size, it is, in effect,
becoming a different organization.
Change always has risks associated

with it, which can make or break
a company. For example, growthrelated changes impact the amount
of capital required, the time and
attention management can spend on
multiple projects, and the expertise
required to complete new types of
projects. Change can be threatening.
Advancements in field and office
technology and developments in
project funding methods introduce
risk potential. Selecting and implementing new technology consumes
management time, and, if the selected
technology does not perform as
expected, can be costly. Innovative
project financing methods, combining
private and public funding, present
risk simply because they are new and
there is limited experience with them.

RISK IS NOT A DIRTY
WORD. DESIGNERS
AVOID IT. OWNERS
PREFER TO PASS IT
ALONG. CONTRACTORS
ABSORB IT.
Dealing with all these changes, and
with an industry that continues to
evolve, demands considerable management attention and exposes the
organization to increased and, sometimes, unrecognized risks.
* Management Risk - Management
decisions will determine whether
an organization will succeed or
fail in this ever-changing construction business environment. The
decision-making process begins
with beliefs that must be regularly
reexamined as the business environment evolves. Beliefs that were
appropriate in the past may not be
so in this new normal. Some unexamined beliefs in place for a long
time are no longer valid, such as
growth is always good; having some
unprofitable work is unavoidable;
and past success implies future
success. These beliefs should be
reevaluated because they are not
true and cannot be embraced by
the "Successful Contractor of the
Future." (This term defines contractors who will react quickly

to evolving market conditions as
distinguished from those who will
continue with business-as-usual.)
Thirty years of accumulated study
as a contractor, work-out specialist,
consultant, and research professor
have verified the following realities
about risk in the construction industry:
* Construction is basically risk
assumption.
* Risk-taking is embedded in a
contractor's DNA.
* When a contractor signs a new contract, it's like the contractor's first
day in business again.
* Every time a contractor starts a
new project, the contractor voluntarily assumes risks that are not
fully defined.
Construction is a highly complex
endeavor that is worked out over a
relatively long period of time, the success or failure of which is affected by
weather conditions, labor problems,
inflation, unexpected rises in interest
rates, the high cost of equipment, a
tightening or shrinking of the market,
or simply bad luck.These factors, combined with the risks detailed above,
make measuring project risk in advance
enormously difficult and requires considerable knowledge about the construction enterprise and the current
construction environment-a specialized field in itself. Management can test
its beliefs by seeking information and
perspective from internal and external
accountants, attorneys and insurance
and surety partners.
Risk and construction are synonymous. Risk cannot be eliminated, but
it can be mitigated. However, risks
cannot be mitigated until they are
identified, measured and thoroughly
understood. This is easier said than
done because the various parties to
the construction process see their
respective roles in addressing risk
differently. Many construction risks
are attributed to more than one entity,
making identification difficult, elimination impossible, and mitigation the
only viable alternative. The challenge
for owners, contractors, sureties,
bankers and designers is to:
* Recognize and identify specific
risks in advance

NATIONAL ASSOCIATION OF SURETY BOND PRODUCERS | WWW.NASBP.ORG

13


http://WWW.NASBP.ORG

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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