Measure twice, cut once. In addition to being a familiar note of caution for carpenters, this piece of wisdom applies to decisions construction executives must make in a volatile economy. At a time when projects are scarce, competition is fierce and margins are thin, the pressure to reduce overhead is immense.
Choices about what to cut from a contractor’s budget should be made carefully. For example, while insurance is an expense item that may look ripe for reduction at first glance, the wrong move can save money today but have financial consequences that threaten the viability of a contractor’s business in the long run. It’s critical to take a second, closer look at any potential insurance savings with the assistance of a knowledgeable agent who can analyze the impact of decisions.
Less Work, Continuing Risks
Construction spending, as measured by the U.S. Census Bureau, was down in the third quarter of 2008. A late-year survey by the National Association for Business Economics indicated corporations plan to cut back on structure expenses during the next 12 months, and many public agencies have postponed construction projects because of budget shortfalls and the difficulty of issuing bonds during the country’s credit crisis.
This adds up to fewer opportunities for jobs. A shrinking pie is being chased by struggling contractors that must keep bids low to win projects. Even the best, most competitive companies may perform less work next year. Unfortunately, that does not necessarily mean they face less risk.
Take a company that is leaning toward cutting back on insurance premiums by reducing its liability limits. It may seem logical to replace yesterday’s $10 million umbrella with a $5 million limit because less work is under way. However, contractors have ongoing liability for projects completed in prior years.
If something goes wrong on a major housing development, commercial building or public construction project years after completion, the contractor may become the target of a lawsuit. The company’s current insurance dictates how much coverage is available for defending claims and paying losses. If liability outstrips the coverage, the construction company may be forced into bankruptcy and out of business if it cannot cover the loss.
A second area in which contractors should proceed with caution is the temptation to cut back on risk management activities that have protected them in the past. For example, a construction company may have an on-staff safety professional who oversees training and monitors claim losses to identify and address areas of risk. Eliminating this position may mean salary savings now, but could lead to higher costs for losses that were prevented when the risk management program was in place.
Or, a company may have an established pattern of maintenance for equipment that keeps accidents to a minimum. Cutting corners by deferring maintenance (i.e., not replacing worn out equipment such as truck tires) can save dollars today, but eventually may lead to costly accidents and injuries. This not only results in current claims, but also a track record of losses that may make future insurance premiums more expensive.
Working with Agents on Solutions
Construction executives should explore potential cost savings with their insurance agents.
One solution is to look at deductibles and weigh how much liability the company is prepared to meet on its own. For example, at the most basic level, the deductibles for damage to the company’s fleet of automobiles can be increased from $250 to $500 or $1,000. The savings can be substantial if multiple vehicles are involved. A company with sufficient resources can use this same approach of increasing deductibles across the range of its coverage, but should take such steps only after carefully considering the financial implications if the company were to face a claim or be found liable for damages.
A knowledgeable insurance agent also can help companies find savings in less obvious places. For instance, fleet policies may include coverage for uninsured motorists that addresses bodily injuries when the responsible party has inadequate coverage for the claim. If the vehicles are used solely for business and not for personal driving, this coverage already may be provided under workers’ compensation.
Another area to explore is increasing efforts to return injured employees to work quickly. By reducing losses on workers’ compensation cases, a company impacts its future premiums and lowers current costs of replacing injured workers.
Today’s economic environment is particularly challenging for contractors because they are impacted by both the slowdown in construction and the difficulty of arranging project financing in the credit market. Cutting costs is essential, but it’s important to do so in a way that does not increase financial exposure in the months ahead. By working closely with an experienced agent, construction executives can make wise decisions about their insurance coverage that will position them well—both now and in the future.
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Friday, September 3, 2010