The strategy chief for surety construction services talks about having the right people to prevent failures
ENR recently exchanged email questions and answers with Gregg Lyon, chief strategy officer for Bond Construction Services, Strategic Initiatives and Product Management at Travelers. A graduate of Babson College, he has worked 28 years for the company in various underwriting and surety related posts. With a volatile stock market, interest rates slowly creeping higher and talk of an inevitable economic slowdown, the discussion revolved around contractor failure. Lyon talked about whether there’s anything new that can sink a construction contractor and what the best wisdom is for staying out of trouble. The questions came from ENR Deputy Editor Richard Korman.
ENR What aspects of the economy or financial market performance are of most concern for Travelers’ surety and contractor clients?
Lyon No surprise, but the biggest concern for our clients remains people. There continue to be headwinds to get enough of the right, qualified people to meet future business plans. The loss of people to other industries, the very low overall unemployment rate, and the lack of enough new people coming into construction will continue to present some significant business challenges to construction company owners.
The issue second to people is public spending. The current environment is inconsistent in how it’s impacting our clients, with our heavy civil clients feeling the hurt much more than our general contractors. The private sector spending has been elevated the past few years, which has been good for our GC’s, but the lack of progress in overall public spending has made it hard for many firms, especially heavy/civil, to plan appropriately for their business.
What are some of the most common reasons behind contractor failure / construction surety claims?
We certainly are seeing common threads. We’ve been doing an annual review internally since 2009 where we look at our top 10 losses and do a deep dive to see what caused these clients to fail or default.
Over those nine years, factors that have been big contributors to contractor failure include a problem on a project that ends up being too big, internal cost system failures, overextension and excessive debt.
Tell us more about the problems and how they develop.
The biggest thing we’re seeing is that one project or one bad decision can take a company down. More often than not, it’s a company taking on a job that’s a lot bigger than they’ve ever taken on before, working for an owner they haven’t worked for before or doing types of work they haven’t done much of before. Taking on a job that’s too far away from their area of expertise or doing a bigger job in a different location for a different owner can be a recipe for disaster. We all know that contractors are optimistic by nature. They know they can figure it out, but one thing we’re finding is that sometimes big problems can become too big to resolve.
The best protection would be a healthy balance sheet or lots of cash?
A good balance sheet certainly helps weather a storm, but even good balance sheets can get blown up with the wrong job. It’s become clear that every decision a company makes can have a material impact on its future.
What’s the blueprint then for staying out of trouble? Is there one?
A lot of companies do things really well, such as having good processes in place: who signs off on the decision to go after a job, who reviews the contracts, who makes the go/no-go decision. If you’re doing something a little bigger or different, you want to dig deeper, review the contract terms, look at the cash flow on the job, ensure the margin on the job fits the level of risk, and make sure that the risk-reward is in line with the overall risk appetite of the company.
I think you’re talking about overextension in a lot of the mistakes you mentioned, right?
Yes, overextension, especially when you’re maxing out your organization. That can mean from a cash flow standpoint or from a personnel standpoint. One thing I would tell contractors is to constantly assess their organization and know its strengths and weaknesses, know what its capacity is – and this is not a one-and-done process, it should be done on a frequent basis.
That assessment should always start with people. Do you have the right people in the right places to handle the work you want to take on? Do they have the skill sets needed to carry that work out successfully? If you have the right people in place, coupled with the financial wherewithal to support your future needs, then the chances for success improve tremendously.
What steps can companies take to improve their chances for long-term success?
Thoughtful strategic planning is a good place to start. It’s not going to happen by chance. Try to come up with a good, solid strategic plan at least once a year, and then revisit that plan multiple times throughout the year. The key is to not put it in a bottom drawer somewhere and forget about it for a year or two. Rather, it should be used as a working document.
Sureties and bond producers get very involved with their contractor clients and their businesses. You’ve told me that Travelers reviews bids and contracts, does accounting reviews and offers consultations and conferences. That’s a lot. Does every bonded contractor of Travelers get them or must they be purchased as add-ons?
That is a lot. Our contractor clients have high expectations as to what they get out of their surety relationship, as they should. As a surety, we have a unique vantage point into the inner workings of thousands of construction firms, and we believe we can help our contractors be better at what they do every day if we pass on that knowledge. Ultimately, this benefits the client, our agent partners, and ourselves. This is why we spend so much time with the bid and contract reviews, as well as financial benchmarking, and offer these as part of being a company’s surety. The only “add-on” is the consulting.
You mentioned that two years ago, Travelers purchased The Family Business Institute? What does it do?
The Family Business Institute is a small construction-specific firm which facilitates CEO performance roundtables, or peer groups. That, in addition to continuity and strategic planning, is a service we felt could really help our clients. The institute is still run as a standalone business which charges clients directly for their services, whether they’re a Travelers client or not. In fact, a large number of their clients are not Travelers surety clients.