Contractors that are taking on projects to keep busy during the economic downturn are moving into unfamiliar areas that are fraught with new risks, experts say.
“With limited amounts of work, contractors have been forced to change up their operations,” said William Sullivan, Hartford, Conn.-based vp of Hartford Financial Services Group Inc.’s construction group. “So they’re going into new territories and working on new types of projects, which can really increase risk.”
Speaking during a panel discussion last week at the International Risk Management Institute Inc.’s 30th IRMI Construction Risk Conference, Mr. Sullivan said contractors taking projects in unfamiliar areas involve themselves in new relationships with subcontractors that have employees “who might not be fully trained. They also are working in territories that have a different claim legal environment.”
There is danger in “going out of your sweet spot” into unfamiliar territory, agreed James E. Conroy, vp and chief underwriting officer in Liberty Mutual Group’s construction commercial markets operation in Boston.
“It’s one of the classic textbook temptations that people tell you to avoid,” Mr. Conroy said. Builders are looking further afield for new jobs or moving into different types of construction locally. For both, contractors are encountering risks they are not practiced at managing, he said in an interview.
Contractor mergers and acquisitions are occurring more frequently during the weak economy, which add unfamiliar risks, sources at the Orlando, Fla., conference said.
“There have been a fair amount of mergers over the past 18 months,” Scott Rasor, Schaumburg, Ill.-based president of Zurich North America’s construction group, said. When contractors combine, an insurer’s underwriters and engineers need to be involved to help the new entity and the insurer understand the risks the new operation faces, he said.
Work that previously might have drawn four or five bidders now is attracting 15 to 20, some of which are unfamiliar with the work they hope to win.
“They might say, “Hey, I always built buildings. I’m going to build a road now. I’m going to get into infrastructure” said Paul R. Becker, president of the construction division of Willis North America Inc. in Nashville, Tenn. “That may as well be building cars and building airplanes. It’s two completely different outcomes. It feels like contracting and it looks like it,” he said, but they have “nothing to do with each other.”
Exposures get even more complicated when contractors move into states where they have not operated previously, experts said. Apart from unfamiliar legalities and regulations, the nuts and bolts of construction can change drastically from region to region, they said.
“There are the things that go into everyday contracting, so there’s different soil conditions, different predictability in what it’s going to cost to hire subs,” said Jeffrey A. Segall, senior vp with Willis of Florida Inc. in Tampa, Fla.
Moving to a new geographic location puts contractors into a “different selection pool of subcontractors, so you don’t necessarily know who’s good and who might be problematic from a quality standpoint,” said Liberty Mutual’s Mr. Conroy. “And if you start doing work that you haven’t done before, there’s a huge risk in it from a business standpoint for the contractor and, in a derivative fashion, for the insurance company.”
Contractors need to keep “their eyes open and keep their insurance companies advised” so insurers don’t find out about a new venture when a claim is filed, Mr. Conroy said.
Contractors already familiar with the type of building “obviously understand the risks and exposures in that area and price their jobs accordingly,” said Timothy R. Kania, senior vp of energy and construction at Liberty International Underwriters in New York.
“If you’re winning those bids, it means you are undercutting the specialists who probably understand the risks associated with it and what’s required to do the job on a quality basis,” said Mr. Kania. “You’re beating out the people who really understand that business and you’re trying to learn it as you go.”
When contractors move into a new specialty area, “the No. 1 issue is whether they have the expertise to complete the job successfully,” said Zurich’s Mr. Rasor. The goal is “to put together a project that functions as it was intended, without defects,” while managing the construction site “in a manner that sends people home at the end of the day and doesn’t cause damage to the environment and the neighbors. If that is not already in their core skills set, the question is, how do they obtain it?”
That happens, he said, either by “joint venturing with someone who has that expertise or integrating into that business by merger or acquisition.”