In an uncertain economy, why is it important for contractors to increase their capitalization in order to maintain surety credit?
Brock Masterson
COO – Surety Division
Crum & Forster
Surety Division

Even the best contractors can’t foresee every challenge throughout the life cycle of a construction project. Supply-chain delays, cost inflation, unexpected change orders and contractual claims can wreak havoc on project schedules, profitability and, perhaps most importantly, cash flows. Contractual dispute-resolution clauses often require contractors to continue working and performing their contracts during the claim-resolution process, regardless of ultimate responsibility. To the detriment of the contractor, this process often includes a combination of mediation and arbitration before proceeding to litigation. This can lead to contractors using their own capital to fund disputed work—potentially for years and many times without payment by responsible upstream parties. During the past year we have seen news coverage of numerous contractor failures due in part to liquidity problems caused by litigated contractual disputes. Contractors should build balance sheets that maintain sufficient capital and liquidity, so unexpected conflicts or cash-flow issues cannot impair the ability to pay bills as they become due. Establishing stable credit facilities to support unexpected cash-flow shortages on a short-term basis is a best practice. Firms should build strong relationships with bankers, attorneys, surety agents and surety carriers, as they can offer valuable insights on the best practices needed to overcome unexpected conflicts or cash-flow issues. A disciplined financial plan and trusted professional relationships can help contractors weather uncertain times.

Reprinted courtesy of Construction Executive, a publication of Associated Builders and Contractors. All rights reserved.