Bonding Q&A with Petrela, Winter & Associates
The prevailing pandemic has given rise to a number of unique challenges for businesses, including the construction business. Our experience gained in attending to the needs of our construction clients during the crisis has give us an informed perspective.
This document is an excerpt of a top 10 list of questions about surety and bonding published on our website.
What impact is the crisis having on the bonding industry? Should I expect any changes from my surety?
After an unprofitable year for Canadian surety in 2018, the industry rebounded in 2019 with profitable results posted by most individual sureties and the industry overall. The surety industry was in a healthy state as we entered the crisis, however, the resultant economic disruption has had an immediate impact and imparted a more cautious approach from bonding companies.
Most sureties are asking more questions of existing clients and being more selective in the new clients they take on. For well performing and financially sound construction companies, things should be more or less “business as usual” with their surety, aside from perhaps a little extra scrutiny and questions around how the contractor is managing the disruption.
For contractors that have struggled to generate consistent profits, are weighed down with high debt levels, or have historically struggled to get adequate bond support, dealings with your surety are likely to become more difficult in the current environment. Some may even face restrictions in bond support. For these contractors, having an experienced bond broker in your corner who can offer creative solutions and privileged surety market relationships will be a difference maker.
What can we do to ensure no adverse changes to our bond program?
A specialized surety broker with exposure to numerous bonding companies can provide perspective as to how the different markets are behaving and how they would act in the exact situation the contractor finds themselves. Your broker should also be in direct and consistent contact with your surety and your underwriter specifically, gauging their comfort not just on your business, but also on the surety’s overall approach and temperament in the current marketplace.
There are tried and true strategies to maximize bond support in any environment, however the current disrupted business environment presents new issues which require a different plan to maximize your bonding. Sureties will be looking for a thoughtful strategy around how you will manage any project delays or shutdowns, supply-chain issues, reduced productivity, and payment delays and reduced cashflows. These are concrete items, and include an analysis of your existing contracts for relief measures; a stress test of your liquidity; a realistic re-evaluation of your opportunity pipeline; discussions with new or existing lenders to ensure credit facilities remain adequate (including tapping into the right loan program) Again something your experienced bond broker should provide guidance and solutions for.
How will my performance bond respond to claims made for COVID-related delays or interruptions in work?
It is important to remember that the performance bond will only respond if the principal (contractor) defaults in their obligations under the contract. If work is interrupted and the contractor is delayed, and the contract provides relief for the delay, then the contractor is not in default and the bond will not respond. In other words, a bond can’t be enforced to fulfill an obligation that does not contractually exist. A precise review and interpretation of the contract wording is required, with particular focus on delay and/or force majeure provisions, and the associated notice requirements.
The best way to deal with bond claims is to avoid them. During these uncertain times, we recommend contractors take a proactive approach to anticipate and manage issues and delays, and to actively engage the owner and consultant to keep them informed of any challenges and collaborate on solutions.
How can we manage and minimize COVID-related risk?
Start by reviewing your SAFETY and LEGAL obligations:
- Address the health and safety of your employees and colleagues.
- Review the current legislative environment in your province or region with respect to essential services, and the status of construction projects.
- For projects that are ordered or forced to shut down, review our publication on Managing Temporary Project Shutdowns and consult with us for additional material/advice.
Next, take account of your FINANCIAL and OPERATIONAL realities.
- Determine the financial resiliency of your company. Revenues and productivity are going to be greatly reduced, costs are going to escalate, receivables may be harder to collect and payables are going to be called on. Manage your cash prudently.
- Talk to your bank to ensure no changes in your credit program. What assistance programs are available for your business and your employees?
- Arrange a call with your surety broker to ensure your bonding company is up to date on the actions you are taking. Do you have the surety support you need?
- You may have to look at your internal cost structures – footprint, rent deferrals, staffing and compensation levels, and “discretionary” overhead. Difficult decisions are being made across the industry
Finally, look to the horizon, and begin to think STRATEGICALLY. Think not only about what your company must do to emerge, but how could take advantage.
- Review your opportunity pipeline. How likely are private owners to come out of this wanting to spend money on construction? How will that impact your business?
- Where is construction money likely to be spent? Infrastructure always benefits during recessions.
- When bid opportunities do begin to return in force—and they will—remember the truism from our friends at FMI: contractors rarely starve to death; instead they die of gluttony. Build your backlog back up slowly and strategically, remembering that most contractor defaults occur when contractors don’t have the cash to finance heavy backlogs.
All of these questions are designed to offer advice to construction contractors on how to manage one aspect of COVID related risk. Petrela Winter & Associates have dedicated resources and detailed position papers on a vast array of COVID related topics and issues, which are constantly being updated. We are committed to helping contractors manage the disruption and position themselves for success in the new environment.