Surety Bond Quarterly - Summer 2017 - 15

* Assess and quantify their importance and the exposure
* Mitigate and manage their impact
and cost
To accomplish this requires specialized knowledge, industry intelligence and experience with large
numbers of similar projects. It is also
necessary to have access to hard-tofind, and sometimes very confidential, information. The primary source
for this information is sureties, which
have extensive experience and data
from prequalifying firms in all types
of construction in various locations.
Mitigating Risk
The willingness to take risk is at the
very core of the construction enterprise, and it is unlikely that risk will
ever be eliminated from the building
process. The ability to recognize the
true nature of risk, assess its impact
on an organization, and take steps to
mitigate that impact will be a fundamental skillset of successful industry
participants-owners, contractors,
sureties, bankers and designers.
* Owners have the easiest mitigation route, as they can bond around
their exposures, and have a knowledgeable surety do the critical prequalification process, screening out
ill-equipped enterprises, and cover
the costs if things do not work out.
* The contractor of the future needs
to elevate risk management within
its organization and embrace formal risk management processes,
which, fortunately, are becoming the construction industry's
newest discipline.
* Sureties have an important role to
play in the construction process
and bring a unique perspective
to contractor and subcontractor
screening through the underwriting
process, along with financial capability when there is a problem.
* Bankers can have the same protection as owners by requiring payment and performance bonds on
the projects they finance.
* Designers will want to assist clients with the selection of contracting methods and project
participants, while encouraging

collaboration among all parties to
the construction process.
Hidden Risk
* Diligence is required because construction business risks and project
risks are often not apparent and
may be disguised in many forms.
For example, top-line growth may
appear to be an avenue to success,
but can also lead to failure.
* More tightly drawn contracts pushing any and all risk to others may
appear to be needed protection,
but can create more problems than
they solve.
* An expanding market looks like
an opportunity, but can also be a
mine field.
The contractor of the future needs to
learn an entirely new skillset to recognize risks hidden in the market, hidden
in their own management decisions,
and hidden in the economic climate.
Too often what looks like good news
has the potential to be hazardous.
Rate of Growth
Unfortunately, in the construction
business, past success is not necessarily an indicator of future success. In
fact, my research on the causes of construction business failures indicates
that every change in a successful organization, particularly growth, creates
a period of risk in spite of all previous
success. When a construction organization substantially increases in size, it
is no longer the same company it was
before growth and often will not be
successful if it maintains pre-growth
management methods. A construction
enterprise growing at what appears
to be a modest rate of 15% per year is
actually a significant rate if it is continuous because it compounds quickly.
At 15% a company doubles in size in
five years and triples in eight. The successful construction enterprise of the
future will be organized to be market
driven and not volume driven. It will
strive for carefully planned growth but
be prepared to level off or fall back
on volume if the marketplace tightens or shrinks. It will use its markup
flexibly as a competitive tool but not
be forced to take break-even work to

maintain sales. It would have some
flexible overhead built into the organization that could be cut immediately
when not needed, and the contractor
would not hesitate to cut permanent
overhead when downsizing is necessary. The successful contractor of the
future will be willing to reduce in size
to survive.
Traditional Risk Management
Historically, risk management was
considered by many to be an insurance
issue; however, there are significant
business risks that are not addressed
by insurance. The hidden risks in market expansion such as skilled labor
shortage, limited access to capital,
and the ability of management to keep
up with a rapidly changing business
environment have rendered traditional
insurance tools and risk management
approaches inadequate. The successful contractor of the future will develop
internal risk management policies,
procedures, and protocols throughout
the organization. Some will engage or
employ risk professionals.
Conclusion
Construction is a complicated business that should only be attempted
by owners, contractors and subcontractors with strong capabilities in risk
recognition, risk management, and
risk mitigation, because the nature of
construction risks are changing every
day, increasing the potential for business and project failures. The dramatic
swing in the marketplace since 2008
has challenged construction firms to
manage fluctuating sales. The boom
may be back, but market conditions
are very different in this growth cycle.
The skilled labor force was already
being diminished when baby boomers
began retiring at a rapid pace at the
same time that workers, laid off during
the recession, found other employment and left the industry, never to
return. At a time when construction
enterprises have been forced to downsize and had to spread their skilled
labor force thin, they now need to hire
new people who will be unfamiliar with
their methods and systems and may
have limited experience. Some firms

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15


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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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