September 30, 2013
SDI gaining influence on BC projects
Subcontractor default insurance (SDI) is gaining influence on B.C. construction projects, according to a recent panel discussion sponsored by the Vancouver Island Construction Association.
“We do get the job done a lot quicker with Subguard,” said Anibal Valente, vice-president with PCL Construction, who was one of the five speakers at a panel discussion about contract security held in Victoria on Sept. 18.
The panel discussion entitled “Developing Trends in Contract Security” was attended by about 100 people involved in the construction industry.
Over the course of 3.5 hours, the audience heard the pros and cons of SDI, which advocates say streamlines a project.
With bonding, when a subcontractor walks away, a three-month delay could ensue, said Valente. This would not happen if Subguard, which is a trademarked product, is in place.
Subguard is one variety of SDI, which is a form of insurance bought by the prime contractor for protection against the financial impacts of subcontractor default.
With SDI coverage, the prime contractor can select the subcontractor it deems most qualified and can also quickly evaluate and remedy potential subcontractor default situations.
It’s a two-party agreement that gives the contractor more control than if surety bonds had been used, according to supporters.
But to determine which subcontractors are selected, subcontractors must hand over their financial and project records. But, this type of sharing is not appreciated by subcontractors.
“You give over your financial documents,” said Russ Hepworth, panellist and president of Tech Mechanical Systems. “Those documents can be all over the place. Make sure what you’re doing with those statements is comfortable for you.”
When Victoria-based Rob Tournour Masonry recently bid on a project, it wasn’t clear that Subguard was being used, said company co-owner Sheri Eastman. She too wasn’t happy about having her company’s financial status in the hands of the primary contractor.
“We’re protective of that information,” she said.
However the company complied with the request because they didn’t want to turn down a job, and is likely to continue.
Another beef voiced by Hepworth, was that when a contractor uses Subguard, there are not public openings of bids, even if the project is publicly financed.
Glenn Laupland, a project manager with Scansa Construction, added that a company will be told it pre-qualifies after submitting necessary information. But once a company is chosen, there’s no information about how the choice was made.
First introduced in 1995, SDI has been making inroads in B.C. for about a decade.
Nils Sorenson, a panellist and the San Francisco-based Subguard manager for Zurich Insurance, said the product serves the general contractor. It is not intended to be a payment solution for subcontractors.
“There’s nothing directly to assist the subtrades. Nor are there third parties,” he said. “If other trades default, it’s all rolled into one claim.”
According to Sorenson, subtrades need to be aware of the quality and general stability of the general contractor to protect themselves.
Valente said PCL has been using Subguard for about 15 years and the results have been great.
PCL decided to use Subguard due to dissatisfaction, which was also shared by its clients with traditional bonding practices.
PCL’s experience with traditional bonding was it took a long time to replace subcontractors and that bonding only came into play when a subcontractor went out of business.
If a contractor was having problems, such as with quality work or lack of employees, bonding didn’t help.
But, panelist Randy Singh, a construction services executive with HUB International, stands by the three-party agreement between owner, obligee and the bond company.
“(It’s) intense and court-proven,” he said, adding not all of the blame rests on the subtrades.
There are times when subtrades are put into default because the prime contractor hasn’t paid up. If the prime contractor is found to be in default, cheques will be written, Singh said.
Dave Bentley, also a HUB construction services executive, noted that in the last five years, as bond claims have taken a steep rise, the wording of bonding documents has been enhanced.
Hard time lines have been added and money can be quickly dispersed to subtrades when merited.
Valente said PCL uses Subguard to remedy subcontractor problems. However, the policy is used only when the subcontractor goes out of business.
“Zurich doesn’t accept claims without a lot of scrutiny,” he said.
Acknowledging the displeasure faced by Alberta subcontractors, Alberta Infrastructure revised its procurement procedure, said Terry Brown, the panel moderator and president of STBR Consulting.
Bidders who don’t pre-qualify under the Subguard program may still submit bids as long as they can provide surety bonds.
When bids are evaluated to find the lowest bidder, the cost of Subguard is added to bids where the bidder is pre-qualified under Subguard.
As Brown pointed out, the Alberta solution addressed complaints from subtrades who felt they were being excluded.
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