Chinese Drywall
Discussion abounds over the use of Chinese Drywall and its potential hazards. These hazards include the release of sulphur-based gases that can cause illness and corrosion to electrical components. Several lawsuits are pending in the state of Florida as high humidity is causing increased problems for the imported drywall.
Some insurance carriers are now including designated product exclusions and designated work exclusions. These exclusions apply to both general liability and umbrella coverages for such classes of business as building materials dealers and wallboard installation. Even those insured with limited exposures may begin to see these types of exclusions appear on their policies.
If you install or sell any type of drywall, it is recommended you review documents such as subcontracts, purchase agreements, insurance policies, warranties, and builders risk policies in order to ascertain the your level of risk, then explore possible mechanisms of risk transfer.
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This issue of the Punch List is sponsored by
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Overhead Means Overburden
The construction industry continues to experience the worst economic conditions in generations. In 2009, most contractors experienced a 40 to 60% reduction in sales. The availability of work in both the public and private sectors will continue at depressed levels for the next 12-18 months, creating more bidders on projects and further driving down already tight profit margins.
In order to survive these tough economic times tough decisions need to be made. Since profit margins are thin, and in some cases non-existent, in today's world there is no room for "fat". If you haven't already taken a hard look at expenses and taken appropriate actions to reduce costs, there is no further time to waste. Personnel expenses are typically the highest costs associated with operating any business. If eliminating some positions is not prudent, you can get creative by trimming expenses with having employees work a four-day week, instead of five, saving 20% in personnel expenses.
Scrutinize other facets of your operation to determine where redundancies exist and eliminate them. Renegotiate your company's mobile service agreement and eliminate unnecessary travel and entertainment expenses. Go "green" and install energy efficient lights and heating/cooling systems.
Don't overburden your organization with unnecessary costs which are eating into your profit. Appropriate actions must be taken to keep your business viable and around for many years to come. These are very tough decisions but they must be made in order to survive difficult economic times.
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Managing Subcontractor Default
Due to the economic downturn and competitive pressures to lower margins, it is anticipated that contractors may begin to see an increase in the number of subcontractors at risk for default. There are seven steps that contractors can take to manage their exposure to this type of risk.
- Use subcontractors you are familiar with and whom you have developed a good business relationship. Strong relationships as well as good communication will be key in settling disputes that arise and should help in avoiding negative outcomes.
- Prequalify all subcontractors. Being sure you have the contractual right to do so, review their financial statements and interview their sub-tiers, vendors, and employees to see if payments are being made on time.
- When in doubt of a subcontractor's financial situation or when a subcontract is of material value to a project, require subcontractor bonds to minimize and spread risk on the project.
- Diversify. It will be important to have good relationships with a number of subcontractors in each trade so that you don't expose every project you have to the same risk.
- Watch for signals of distress. Some red flags might be: aging of receivables and payables, a bid that is drastically lower than those of other bidders, failure to return phone calls or e-mails, and failure to show up at regularly scheduled meetings. Project managers should be trained to report any early signs of distress.
- React promptly. If it becomes necessary, use a funds control service to make sure the funds you pay the subcontractor are being used to pay suppliers and sub-subs on your project. If a default occurs, take remedial steps quickly to keep other aspects of the project on track.
- Joint checking is always a useful tool in assuring sub-tier contractors and suppliers are getting paid. Don't hesitate to use this tool, which is becoming more prevalent in the construction marketplace.
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Going "Green"
A "green" building utilizes technologies and practices that promotes resource efficiency, reduces environmental impact, and increases occupant health.
There are three major certifications for being green:
- The Leadership in Energy and Environmental Design (LEED) Green Building Rating System, which has LEED-certified, silver, gold and platinum levels;
- The Green Building Initiative (GBI) Green Globes Rating System, which gives a rating of one to four; and
- The U.S. Environmental Protection Agency Department of Energy (DOE) Energy Star program.
From a risk standpoint, green building products are new enough to the market that their potential to create risk is still somewhat unknown. Even with the uncertainty that new products will meet promised performance levels, there are some insurers that seem willing to develop insurance products for the green building industry. It is expected that more insurers will enter the marketplace once there is more actuarial information available.
There is no doubt that "green" projects are better for the environment, but just because a property or structure is "green" doesn't mean it's free of environmental liability or related issues. It is likely claims related to green exposures will climb in the coming years as increasingly more contractors and site owners engage in green building practices. It is recommended that you discuss your "green" exposures with your risk manager.
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