December 4, 2013

Changing procurement impacts felt

Steve McConnell's job is to advocate on behalf of his contractor clients to bonding companies, telling the insurers that his clients have the construction and financial skills to complete a quality job, on-budget.

But today’s construction environment, with tight profit margins, is making it increasingly difficult for the small and medium sized contractors he works with throughout B.C. and Yukon.

When those firms suffer, it creates a domino effect.

“For the bonding industry, it lives and dies by the success of contractors,” said McConnell, an account manager with CMW Insurance Services in Burnaby, B.C.

“And, when small and medium contractors don’t do well, we don’t do well,” he said.

What’s contributing to the challenging climate is the influence of big construction companies, a small but select group, said McConnell, an accountant with 20 years of experience in the finance, surety and insurance fields.

By using the bundling of projects or public-private partnerships, the handful of major Canadian companies, being joined on home soil by huge international construction companies, are grabbing a lot of the major projects.

Local contractors, who have no control over the project funds, are hired by big contractors, who instead of going the surety or bonding route are often opting for subcontractor default insurance.

Now smaller companies have to negotiate with big contractors to get work, which can mean tactical moves to gain favour with the big players, McConnell said.

The smaller players often assume more risk because they have little control.

With the potential for less revenue, survival gets tougher.

According to a recent Surety Association of Canada report, “Contractors with distressed balance sheets may become overly aggressive in their efforts to obtain work, thus creating the vicious downward cycle, which leads to insolvency.”

According to Stephen Bauld, bundled projects require a large bonding capacity.

This requirement may put projects out of the reach of small and medium-sized contractors (SMCs).

The result could be that SMCs won’t be able to compete for work on projects they previously may have won, said Bauld, president and chief executive officer of Purchasing Consultants International.

Bauld, who served as the vice-president of the Ontario General Contractors Association for four years, used the example of bundling for a 37-school project.

He said such a project immediately knocks out smaller companies, who can’t get bonding for such a large undertaking.

“It has a huge impact on the bonding industry,” he said.

The project also reduces the pool of bidders, he added.

Fewer bidders, maybe only two versus seven, means that the cost will be higher.

If the 37-school project had used separate tenders, SMCs could bid on individual schools.

With schools being built one-at-a-time, SMCs would be able to pre-qualify.

They would also get bonded through a surety company, Bauld said.

The decline of traditional bonding due to P3 or the bundling projects also means that transparency is disappearing, McConnell said.

A tender for the school would go out, the lowest bidder would get the price, the school would get built and government would pay the price.

All of the math would be clear, he said.

With a P3 project, the decision-making is taken out of government’s hands and put into the hands of “politically strong and influential” companies who are not compelled to publicly reveal financial details.

Still, there remain smaller jobs, such as roadwork or sewer and watermain projects, where SMCs can still flourish, McConnell said.

The current cycle, where small and medium contractors are operating in a financially challenging environment has happened before, most recently in the early to mid-90s and the bonding and surety business survived.

“The bonding industry will always be around,” McConnell said.

“We are coming out of a recession and it’s hard for companies that haven’t been around for a long time. But, smart people, people who work hard, do well.”

Bauld emphasized the importance of the industry.

“It’s critical in Canada to keep the construction industry working,” he said.

According to Statistics Canada, in 2010, Canada’s construction industries accounted for six per cent of Canada’s gross domestic product (GDP), contributing $73.8 billion.

From 2000 to 2010, construction GDP increased 43 per cent, whereas GDP for all industries increased 20 percent. In 2010, seven per cent of employed Canadians aged 15 and older worked in the construction industry.

That was an increase of 51 per cent since 2000, when 806,900 people worked in construction.

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