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The construction blues.

Insurance and Bonding Represent Increasing Headaches for Contractors

CONTRACTORS ONCE were thought of as the hard hat-clad people who hung around construction sights dictating assignments from clipboards.

But the industry has changed.

"We spend more time with our head in the computer now than we would at a construction site in the past," Rex Crane says.

Crane, president of Crane Construction Co. in Little Rock, says, "We're starting to trade our hard hat and clipboard for a computer and a desk."

That, for the most part, is thanks to complicated insurance and bonds contractors must purchase to compete for work and to actually produce it.

"Now you've got to get your computer and start working with your agent," Crane says.

"A long time ago," he adds, "you could walk in and say, 'This is my contract. What's my insurance?'"

But today, most contractors can't even get a contract without first obtaining what is called a "bid bond."

A bid bond is a guarantee that if a contractor is awarded a project, he will be able to complete it.

The Arkansas Legislature recently passed a bill requiring contracts in excess of $50,000 to include the price of a bid bond in the bid.

This applies only to listed contractors. That includes electrical, mechanical, roofing and sheet metal workers.

"General contractors can be left exposed to a lot of liability," Chuck Brown says. "They want to cover themselves and provide a safer working environment."

Brown is director of public relations for the Arkansas Chapter of Associated General Contractors of America.

He says, "Contractors are requiring a lot more of their subcontractors, and that's causing a lot of changes."

"We're going to see a lot of people who have never had to have bonds before thrown into the arena," Matt Cashion says. "A lot of them are going to be shocked by the amount of information required to obtain the bonds."

Cashion is secretary and treasurer for Little Rock's The Cashion Co., comprised of independent agents specializing in bonding and insurance needs.

One of the biggest headaches for contractors, Cashion says, is the constantly increasing amount of information bonding companies need before they will secure a project.

That not only includes audited financial statements, including personal ones. Crane says the bonding companies will even bug contractors for family information, right down to "what time you go to the bathroom every day."

Cashion says, "The requests seem to be that severe. They really do."

"They want to know everything about you," Crane says. But he understands why.

"Like Randy Moss handicaps a horse at the races, the bonding companies handicap the contractors," Crane says.

That means, for example, if a new company has the funding and the manpower to do $100 million in revenue its first year, it can't do it unless it receives the proper bonding. A bonding company may not be willing to take a risk on a construction company until it is proven.

Deceptive Industries

Bonding and insurance often are assumed to be the same thing, but they are two separate industries.

Bonding is an extension of credit more akin to the banking industry than to the insurance industry. It just happens to be a division of large insurance companies.

Bonding companies guarantee a site's owner that contractors will perform and pay bills as expected.

The companies do not expect to make payments whereas insurance companies do.

For instance, insurance companies provide workers compensation and automobile and equipment liability. They will also provide general liability for possible injuries of non-employees on a job site. There is even completed operations insurance in case of an accident on the site after a project is completed.

There are tiers of insurance. For instance, a company supplying a dirt truck for a project will have to insure the truck, as will the general contractor who hired it.

Hired contract workers for a project have to be insured by both the subcontractor and the general contractor, although it will have to pay less than if the workers were full-time employees.

Contractors pay the most insurance for workers compensation, which typically runs 15-20 percent of labor costs on a job.

General liability coverage runs 2-5 percent of labor costs. It is common for the total labor burden to be 30 percent of a contract bid.

Overall, insurance costs have doubled in the past decade.

"It's an across-the-board cyclical increase," Cashion says. Workers compensation is driving today's insurance costs, but in past years general liability and other types of insurance were the big-ticket items.

Meanwhile, bonding costs have risen only 44 percent over the past decade. The average price of a bond is 1 percent of a contract.

Bonding companies write bonds with the idea that there will be no losses to pay, yet millions of dollars were lost in the business in Arkansas alone in the past decade. The 1990s are so far proving better for the business.

But contractors still have to deal with the recurring headache of bonds and insurance.

Large construction companies can hire someone in-house to handle the purchasing, but smaller companies around the state sometimes do not even hire an insurance or bonding specialist. Instead, they go to a local agent more accustomed to handling homeowners insurance.

That may not be a smart move, some say.

"It's going to become more and more technical," Jack Gabler says of the business of purchasing insurance and bonds. Gabler is a branch manager with Bituminous Insurance Cos. in Little Rock.

Gabler says contractors and insurance companies both have more and more to keep up with.

For instance, workers compensation alone is enough of a problem that most companies do not write policies anymore.

"We're taking a beating, I'll tell you," Gabler says. "The losses are just beating us to death."

Contractors are not devoid of the pain, either.

Lewis May, of May Construction Co. in Little Rock, also owns the eight-employee Crown Millwork Co.

He says the workers compensation increase this year is equal to a third of his profits last year.

"We get one more increase like this, there's eight more unemployed people, I guarantee you," May says.

"We're hearing a lot of these stories," May adds.

Most insurance and bonding problems are not this drastic but, as Gabler says, "It's always a headache."

Insurance and Bonding Breakdown

The following is a list of the most common types of insurance and bonds that contractors have to purchase to compete for and to produce work.


* Workers compensation

* General/public liability

* Completed operations

* Automobile liability

* Equipment coverage

* Owned property exposures


* Bid bond

* Construction or performance and payment bond
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Title Annotation:Construction; includes related article; complicated insurenace and bonds contractors must buy to remain competitive
Author:Rengers, Carrie
Publication:Arkansas Business
Date:Mar 22, 1993
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