As the economy improves and commercial construction expands, it is critical that owners are careful with their selection of both design professionals and contractors. According to BizMiner, less than 70% of the contractors in business in 2007 were still in business in 2010. To make matters worse, many of those surviving contractors are not financially sound. As a means of lowering operating costs, many contractors have reduced their insurance coverage, cut back on safety and quality procedures, and trimmed down employee benefits. Due to the decline in the financial strength of most contractors, surety companies have tightened their bonding requirements, thus making it difficult or impossible for some contractors to obtain bonding. If a contractor cannot bond a project, this should send a serious message to the owner! Not only is the project’s completion at risk, but a real possibility of lien filings on the property exists.
In 2010, a nationwide construction company that specialized in prefabricated construction declared bankruptcy. This came as a huge shock to the industry, as this company was owned by a large private equity firm with deep pockets. In addition to failing to complete several contracts, the contractor did not pay numerous suppliers, subcontractors, and employees, and did not return down payments it received from several owners. If the owners had required this contractor to bond these projects, most of these financial losses would have been eliminated or minimized.
States like Texas have few requirements for contractors. There is no licensing registration program for contractors, workers compensation is not required unless the project is publicly funded, and property and casualty insurance requirements are often understated. When selecting contractors and design professionals, an owner needs to carefully check their references, and ask themselves the following: How technically competent is the contractor/designer? How financially strong is the contractor?
Necessary insurance coverage varies depending on the location and size of the project; however, the contractor should be required to have Workers Compensation, General Liability, Umbrella Coverage (minimum of $5 million), and Builders Risk Insurance to cover the project while under construction. If the contractor is responsible for both design and construction, that entity should also have Professional Liability Coverage.
One of the best ways for an owner to guaranty the financial success of a commercial project is to require that the project be bonded in an amount equal to the contract. A payment and performance bond not only guarantees that the project will be successfully completed, it also guarantees that all the material and labor costs are paid. Even if the owner does not want to invest 1-3% cost for a surety bond, it is still smart for the owner to require all bidders to provide a letter from each contractor’s surety company as proof of their bonding capacity.
More information about the importance of insurance and bonding for contractors can be found in the April 2011 edition of Construction Executive magazine.
Mike Slataper is the Founder & Chief Executive Officer of Ramtech Building Systems, Inc.