Construction Costs Insurance Risks Surviving in an

Construction Costs, Insurance, & Risks Surviving in an Expanding Market Pete Kelley, VP – Florida Operations Curtis Long – Senior Project Manager

Presentation Summary • Bonding & Insurance • Nature of Construction Costs – Labor – Materials – Equipment – Subcontractors • Risk • Contingency Evaluation

Bonding & Insurance • Payment & Performance Bonds – Current Construction Market • Explosive Growth • Profits Up

Bonding & Insurance • AGC – Construction spending in March ’ 06 set a record for the 8 th straight month - $1. 2 trillion seasonally adjusted – Construction spending was 9. 2% higher in first quarter compared to ’ 05 – 40% increase in multi-retail centers/”Big Box” – Public sector 1 st quarter results • Educational – 14% • Highway & Street – 7. 7% • Sewage & Waste disposal – 28%

Bonding & Insurance • Superior Construction Growth • 2001 • 2002 • 2003 • 2004 • 2005 • 2006

Bonding & Insurance • Payment & Performance Bonds – Current Construction Market • Risk down • Life is Good … • Right? ? ?

Bonding & Insurance • Payment & Performance Bonds – Then Why Are So Many Companies Struggling? ? ? – Jan ’ 01 to Sept ’ 05 the surety industry sustained losses exceeding $11. 9 billion

Bonding & Insurance • Why Contractors Fail – Unrealistic Growth - Expansion in Volume, Type of Work or Geography – Performance Issues - Lack of Experience in Job Size, Complexity or Type – Character Issues - Problems Which Distraction Key People: Divorce, Senility – Accounting Issues - Inadequate Internal Accounting; Costs Not Posted Timely. – Management - Weak Management at Upper or Field Level. – Large Project Concentration – Non Construction Activities - Money & Time – Geographic Spread - Unfamiliar Subs, Labor – Inadequate Profit Margin – Subcontractor Problems – Unapproved Change Orders – Other - Owner Financing, Excess Equipment, Insurancefidelity

Bonding & Insurance • Bid Bond - Guarantees that if you are low or successful bidder you will enter into a contract and execute the required performance and payment bonds. • Performance Bonds - Guarantees that you will perform the obligation as require by the contract in accordance with the plans and specifications. • Payment Bonds - Guarantees that all vendors, and laborers will be paid

Bonding & Insurance Historical Surety’s Assessment 3 C’s • Character - Morals and Ethics • Capacity - Performance Record, Equipment, Credit, Management continuity, etc • CashCapital - Working Capital, Net Worth, Debt, Over and Under-billings

Bonding & Insurance • Surety Benchmarks – Working Capital 3%-10% of Aggregate – Net Worth 5%-20% of Aggregate – Gross Profit 5 -10% – G&A Expenses 4%-8% – Net Profit 1%-2% – Debt to Equity < 3: 1

Bonding & Insurance • Managing the Surety Relationship – Provide Standard Information Timely – Discuss Strategy - Silent Partner – Clear Specs - Reconcile All Schedules With Financial Statement & Educate on Risk Evaluation – Provide In-depth Data on Projects and Organization – Prepare Business Plan & Budgets – Minimize Job Profit Fluctuations – Project 100% Complete & Underbilled Red Flag – Open Projects GPM Higher than Completed Jobs – Underbillings > 25% of Working Capital – WIP does not Reconcile with Income Statement – Educate your Surety

Bonding & Insurance • Payment & Performance Bonds – What Do Sureties Focus • • • Expansion Risk Subcontractor Default Exposure Contract Duration Warranty & Maintenance Periods Liquidated Damages Levels Consequential Damages Provisions Materials Escalation/Industry Inflation Bond Forms Residential Projects Continuity Planning/Ownership Transfer

Bonding & Insurance • Insurance – General Liability – Workers Compensation – Automobile – Builder’s Risk – Professional Liability – Umbrella

Bonding & Insurance • Insurance – General Liability • Must have policy • Market stable for companies with good loss records • Do not be under-insured – Workers Compensation • Safety First is not just a catch slogan • For every $1 in direct WC costs you will experience an additional $ xx in indirect costs • e. g. – a accident with $25 k in medical costs will cost you approximately $100 k

Bonding & Insurance • Insurance – Automobile • Company vehicles are a significant risk/exposure • Non-business related travel • Interaction with the traveling public – Builder’s Risk • If it is not required contractually – do you carry it? • Premiums are significant with large deductibles

Bonding & Insurance • Insurance – Professional Liability • Relative newcomer to the insurance portfolio of contractors • Necessity brought on by the proliferation of design/build work • Necessary even if engineering done by a consultant • Necessary even if “Design/Engineering” is not performed by the contractor or construction manager

Nature of Construction Costs • Labor – Quantity • Single greatest limiting factor to growth is the availability of skilled labor – Quality • As construction professionals we must train younger workers and promote our industry

Nature of Construction Costs • Labor – Cost Escalation Factors • Competition from other contractors • Competition from other industries

Nature of Construction Costs • Materials – Cost of materials has historically been stable – Vendors typically would hold pricing for the duration of a contract – Currently, vendors won’t hold pricing for more than 30 days

Nature of Construction Costs • Materials – Steel • Chinese demand, Buy-American clause – Concrete • Cement & Aggregate shortages – Asphalt • Shortages across the board – aggregate, liquid asphalt, – Dirt • Widespread development has driven land costs to the point that it is no longer feasible to put a borrow pit on real estate near a population center

Nature of Construction Costs • Equipment – Steel – Technology – Labor – Rubber – Demand

Nature of Construction Costs • Subcontractors – Transfer of risk does not eliminate – Consider all factors when selecting subs • • Work history together References Risk associated with the scope of work “How low are they” – consider a bond

Nature of Construction Costs • Market Analysis – ENR Producer Price Survey • • • Ready Mix Concrete – up 11. 9% Aggregates – up 9 % Cement – up 14. 9% Asphalt – up 19% Construction Machinery – up 5. 4% Labor – up 3. 4% – Local Conditions June ’ 03 – Dec ‘ 05 • Ready Mix Concrete – up over 50% since June ’ 03 • Labor – up 15. 7%

What Does it All Mean • RISK !!

Risk Contingency Evaluation • • • Project Identification Owner Identification Internal Labor Supply Material Cost & Supply Issues Subcontractors

Risk Contingency Evaluation • Owner Identification – All owners are not the same • Focus estimating efforts on projects with owners that foster a profitable relationships – Owners do not stay the same • Corporate/agency attitudes often reflect those of top management • Relationships can and do change with changes in upper management • Relationships can change with geographic movement

Risk Contingency Evaluation • Project Identification – Select only those projects that fit your skill set and do not force inordinate risk to your company

Risk Contingency Evaluation • Internal Labor Supply – Analyze current projects and upcoming work – Consider contingency for projects with extended durations, i. e. – greater than 12 months – Projects in remote areas should have special consideration given to availability of resources and prevailing wage

Risk Contingency Evaluation • Material Cost & Supply Issues – Material supply can no longer be taken for granted – Contingencies and escalations must be strongly considered for the following cases • Projects over 4 months in duration should have significant consideration for escalation • Materials that may be susceptible to supply shortages should have consideration given to stockpiling materials • Projects in remote, less populated areas require particular attention with regard to material supply

Risk Contingency Evaluation • Subcontractors – Be selective with subcontractors – Consider bonds on subcontractors with limited work experience, large scope of work, or technical scope

Construction Costs, Insurance, & Risks Surviving in an Expanding Market Summary