The role of an agent or broker as a trusted advisor to contractor clients is more important than ever given today’s challenging business environment. One of the many ways you can add value to your client relationships is to identify conditions or practices that often, from a risk management standpoint, turn problematic over time. These warning signals are wide ranging, but well worth the effort to identify and address as early as possible.
Watching for Red Flags
Although the weak economy has impacted nearly all contractors, the duration of the current difficult conditions makes it all the more critical to frequently address your client’s financial health. Some red flags are obvious, such as negatively trending margins, operating losses, low cash reserves, slower collection patterns and rising debt. Other, less obvious indicators, such as more frequent use of or maximizing credit lines, a higher percentage of jobs underbid, shorter terms on account payables, an increase to unfunded pension liabilities, or a change of independent auditor, all may warrant further investigation.
Of course, a contractor under financial pressure must react in ways that he or she believes are in the best interests of the business. Depending on the degree of urgency, the reaction could be subtle or dramatic. Changes that appear to be reasonable given the circumstances still need to be examined to make certain they are consistent with the organization’s overall risk management plan, and that all contingencies have been analyzed. Think of such changes as additional warning signals that serve as an opportunity to provide valuable risk management assistance to your client.
Recognizing red flags in a contractor’s business practices is the first step. Connecting the dots and finding ways to provide helpful guidance is the critical next step. Three examples demonstrate opportunities agents and brokers can watch for.
New Geography
Contractors may expand geographically to pursue business if work is lacking in their traditional markets. What services can you offer regarding various aspects of operating in a new territory, such as working with unfamiliar labor or subcontractor pools? How familiar are you with the jurisdictional issues in the new territory, particularly if the expansion involves a new state? Will your client’s current contractual risk transfer program work well in the new state without modifications? What changes, if any, are needed? Does the new state have unique legislation of which your client is unaware?
A prime example of this is the contractor based in Vermont or Pennsylvania who bids work in New York for the first time. Sections 240 and 241 of New York’s Labor Law in many cases impose absolute liability on contractors for certain injuries to employees. How can you prepare or educate your client to help them weigh the options and to operate successfully should they ultimately decide to proceed?
There are many other examples of unique territorial issues such as disparate anti-indemnity statutes, widely varying construction defect environments and diverse litigious conditions. Your guidance on navigating the issues associated with a new territory can strengthen your client relationship.
Different Projects
Similar to contractors who move into new territories, some construction businesses may shift to different types of projects, even though they may be outside their area of expertise. For many contractors, it is normal to transition back and forth between types of work depending on where the best profit opportunities emerge. These contractors have a history of operating in such a manner and are successful at it.