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FMI Quarterly/June 2015/June 1, 2015

Moving Into New Markets

Image9Contractors should check and recheck their projections because costs — from labor to retention requirements — differ widely by location.

Pursuing growth in a new market? Be mindful of the increased risks to protect your reputation and profits. From all predictions, 2015 looks to be an opportune time for contractors to take advantage of an improving economy to expand their businesses. The “Dodge Construction Outlook,”1 for instance, estimates that commercial building will increase 15%, led by the technology, hospitality and financial sectors. Institutional building is expected to grow by 9%, supported by an increase in K-12 school construction and health care facility building.

For many contractors, seizing these opportunities may mean broadening their geographic focus and even project scope. However, the enthusiasm for more projects and profits needs to be carefully balanced with the reality of increased risks when moving into a new state, region or country. “Oversights in personnel hiring, worker safety, management training, compliance and financial contracts can quickly turn a potentially profitable scenario into a bottom-line loss,” said Angela Skow of the Zurich Insurance Construction Group.

Swinerton Builders’ expansion model is typically based on following existing clients into new markets, said Senior Vice President-Chief Administrative Officer John Capener. But this doesn’t preclude the firm from performing sophisticated and robust due diligence and risk assessment when working in a new geography. “We’re an employee-owned company, with no outside shareholders. So we’re especially careful of putting our employees’ financial well-being at risk,” Capener said.

Bechtel has been entering foreign markets since the 1940s, and today, a significant portion of its projects is overseas, said Mark Falloon, corporate manager — risk financing.

“Our reputation in the industry is based on the surety of outcome for our clients,” he said. “We do not want to put our reputation at risk, so Bechtel has rigorous processes in place to ensure we are working with the right subcontractors and other partners — especially ones with the same moral and ethical approach so there are no surprises.”

If your organization is looking to move into a new market in 2015 or beyond, here are some of the key risk strategies to consider before breaking ground:

Plan for Labor Challenges

The downside of the improving U.S. economy is that there is a workforce shortage in most markets around the country.

“A successful expansion is predicated on finding qualified people in the area as well as equipping current employees to take on new roles to manage the teams,” Capener said. “Finding experienced people is a lot tougher than it was five years ago. And taking on less experienced workers requires more training — both for quality and safety.”

Screening hundreds of candidates to fill 50 positions is not unusual in high-demand markets. And if a contractor can’t find the labor in that market, transporting existing employees or contract workers in from another area can get costly.

“We often relocate an employee to take on an expanded role in the market, like an engineer becoming a team leader,” Capener said. “This requires additional employee training and setting clear performance expectations to ensure the job gets done right.”

Further, labor laws and physical working conditions differ widely by state, Skow said. New York, for instance, has one of the most stringent labor laws in the country. There, the burden of proof lies with the contractor if a worker injury or death occurs. In North Dakota, contractors might need to be prepared for working in the extreme cold, while in Alaska, they might have to be prepared for bears infiltrating their construction sites.

“The details surrounding your labor force can be numerous — everything from varying laws to pure environmental factors themselves,” Skow said. “Consulting with others familiar with target areas for expansion can help mitigate the risk.”

Explore a Joint Venture

A successful joint venture with a local contractor can ease the expansion into a different geographic area. A reputable partner in the new market can deliver the relationships with local governments and the labor pool to both secure a new project and execute it on time and on budget.

“Even though Bechtel has a large global footprint, we still look to joint ventures to provide support in regard to sourcing labor and having deep knowledge of the local jurisdiction,” Fallon said.

Swinerton’s Capener said joint ventures in a new country often require a different set of working agreements depending on the partner’s operating principles and relationship with the local government. “It’s critical to assess if a potential partner has a similar culture in regard to quality, safety, treatment of workers and risk management philosophy,” he said.

Other considerations before entering into a joint venture include:

  • Is there a willing exchange of business plans and financial data?
  • Who will be the project lead?
  • Who is responsible for the daily execution of the job?
  • Who is going to manage the project risk—including the financial aspects?
  • How will the workers be trained?
  • Do you agree on the right safety programs to put in place?
  • How will worker losses be managed through return to work or other programs?

Perform Rigorous Due Diligence

Breaking into a new market or taking on a different scope of work requires a deeper dive into the risks and rewards of the project in question. Skow suggested contractors always ask themselves if they have the people and management skills for the project, and whether their bottom lines can support the potential for any loss.

Capener said Swinerton’s due diligence is focused on determining if there is enough capital to cover any and all unforeseen costs, and if the appropriate skills are in place to manage the execution.

But situations exist, said Bechtel’s Falloon, where you can’t always totally manage the risk — especially in locations prone to severe weather like the Gulf Coast of the United States or the Pacific Rim’s earthquake zones. “This is when we work with our insurance broker to make sure there is adequate coverage for a potential catastrophic incident caused by nature,” Falloon said.

To determine the financials involved in project execution, Skow said contractors should check and recheck their projections because costs — from labor to retention requirements — differ widely by location. Many contractors bring in outside consultants or use sophisticated modeling tools to help identify risks in new markets.

“You can’t always get to every risk detail by working in a vacuum,” Skow said. “It’s wise to tap into the local expertise — whether it’s legal, tax or even the knowledge of the local subcontractors. You can also ask your broker or insurance carrier to help assess the market risk.”

Swinerton has taken advantage of Zurich’s Total Risk Profiling (TRP) tool to perform rigorous due diligence when moving into a new country. “This tool helps us evaluate everything from the currency conversion to environmental issues and the political environment,” Capener said. “The tool also helps the company manage its foreign insurance coverages, which can be another completely new territory for most companies.”

Capener said the tool’s Risk Room feature provides a dashboard that Swinerton uses in senior executive meetings to objectively determine the project risk and set profit expectations. Some of the factors analyzed during the meeting include regional stability, country rules, taxation, investment level and level of profit penalization when taken out of the country.

“It’s a very visual tool that really helps us to understand how much capital we can invest and what we can get expect to get back out,” Capener said.

Falloon said Bechtel’s highly structured due diligence process gives new clients confidence that the company has done its homework and has planned for everything possible to deliver at the highest level of quality and safety.

“Preplanning well done leads to a project well done,” he said. “It can be that simple.” Q


Karen Keniff is the vice president of construction for Zurich. She can be reached at 410.559.8330 or via email at karen.keniff@zurichna.com.

1 http://construction.com/about-us/press/construction-industry-to-see-more-balanced-growth-in-2015-according-to-DDG.asp

The information in this publication was compiled from sources believed to be reliable for informational purposes only. All sample policies and procedures herein should serve as a guideline, which you can use to create your own policies and procedures. We trust that you will customize these samples to reflect your own operations and believe that these samples may serve as a helpful platform for this endeavor. Any and all information contained herein is not intended to constitute advice (particularly not legal advice). Accordingly, persons requiring advice should consult independent advisors when developing programs and policies. We do not guarantee the accuracy  of this information or any results and further assume no liability in connection with this publication and sample policies and procedures, including any information, methods or safety suggestions contained herein. This is also intended as a general description of certain types of services available to qualified customers through Zurich North America. Zurich does not guarantee any particular outcome and there may be conditions on your premises or within your organization, which may not be apparent to us. You are in the best position    to understand your business and your organization and to take steps to minimize risk, and we wish to assist you by providing the information and tools to help you assess your changing risk environment.
© 2015 Zurich American Insurance Company

 

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