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In its fourth week, the government shutdown that started on December 21, 2018, has had a profound impact on the U.S. economy. Going down in history as the longest shutdown, it has paralyzed whole sectors because federal institutions are closed or are functioning at limited capacity. J.P. Morgan estimated that the losses account to $1.5 billion for every week of the standoff between President Trump and the Congress. As in other force majeure situations, small businesses feel the effects of the administrative blockage the most. For thousands of companies, the last few weeks have been tough due to financial losses and missed business opportunities. Among the numerous federal departments and agencies that have been affected by the shutdown, the Small Business Administration has been closed since December 22. This has strong negative effects for companies using its 7A Guaranteed Lending Program and 504 Loan Program, as well as its Surety Bond Program. The SBA typically approves around $500 million in loans per week. Businesses relying on these programs have not been able to benefit from them in the last month since federal employees at the SBA are furloughed. Since the close, the SBA is not processing loans. This has delayed more than $2 million in lending that was supposed to finance real estate deals, equipment purchases, and other development needs. The result for impacted businesses is a limbo in which they risk losing down payments and deposits. The effect is especially distressing for companies that sought SBA Express loans for immediate financing needs. Many of them have made initial payments for a commercial property and are now awaiting the SBA loan that was supposed to finance the purchase. As sellers are becoming impatient, companies are forced to look for other ways to cope with the situation. They have to either put on the line their payment or seek flexibility and understanding from the seller, which is not guaranteed. Some businesses have increased the deposits for their dreamed real estate with the hope to appease property owners and prolong the period in which they can wait for the SBA financing. For others, the most viable option has been to seek financing from other sources, as not to lose the opportunities and already made investments. As the Washington Post reports, the situation is especially tough for small business owners who were on the finishing line of buying property when the shutdown started. Such is the case of computer specialist Brooks Troxler who had to receive a $550,000 SBA loan for a real estate deal. If the delay continues, he may lose not only the possibility to have a new business location, but also a lot of money invested in fees, appraisals and other administrative costs. Construction businesses relying on the SBA Surety Bond Guarantee Program have also been heavily affected by the shutdown. Contractors often have to provide contract surety bonds when they bid on public and private projects. The bonding is typically required on federal contracts, as well as on many other public ones. However, for many new and small businesses, obtaining the necessary bonding is difficult or impossible because of financial issues or lack of required experience in the field. The Program helps contractors by guaranteeing for their bonding in front of surety providers. It supports contractors with guarantees on individual contracts of up to $6.5 million. This can be increased to $10 million in some cases. In recent weeks, contractors have not been able to obtain support from the SBA. As a result, they cannot get the required surety bonds, as sureties are reluctant to extend backing to applicants that pose a higher risk. This has left many budding construction companies out of the bidding on projects. The repercussions for small contractors are the most serious, since winning a contract can be decisive for their development. How has the government shutdown affected your small business? What steps have you taken to mitigate its effects? Please share your thoughts in the comments below. https://www.cpapracticeadvisor.com/news/12440873/government-shutdown-affected-contractors-relying-on-sba-programs

Navillus Settles Into Normal Business Life After One-Year Bankruptcy Trouble appears to be over between Navillus, one of New York City’s biggest contractors, and five building trades unions. Navillus sought bankruptcy protection 14 months ago after a federal judge ordered it to pay $76 million to union pension and benefit funds. The unions, with which the contractor had agreements, successfully sued the company in 2014. They claimed Navillus violated federal pension law, collective bargaining agreements and commitment to work union through two separate nonunion companies, one of which had ties to Navillus’ owner and president, Donal O’Sullivan. After the judge’s payment order, the unions attempted to freeze all Navillus’ bank accounts through restraining notices. Navillus, which performs much concrete construction as both prime contractor and subcontractor, steadfastly claims in a statement that it “never operated a non-union company and consistently disputes any allegations that they did.” The parties to both the civil lawsuit by the unions and the contractor’s bankruptcy used mediation to reach a settlement and vacate the judgement and decision against Navillus. So far, union officials have not commented publicly. One reason that unions may have agreed to take only $25 million—about one third of what a lower federal court had originally ordered Navillus to pay in 2017—might be explained by the words of a U.S. federal appeals court judge who vacated the order after Navillus’ appeal. “This will keep one of New York City’s largest construction contractors in business,” wrote Judge Colleen McMahon. ‘It will protect dozens of ongoing projects from disruption, preserve numerous union jobs and provide continuing benefit to the plaintiff funds, and all of Navillus’ stakeholders.” Navillus says it kept working on its projects, including two prominent Manhattan towers for which it was constructing concrete frames before emerging from Chapter 11 [of the federal bankruptcy code] last October. The uninterrupted effort “was a testament to the belief and trust that clients have in Navillus,” the company said. Since the settlement, Navillus has been adding steadily to its backlog. Bankruptcy made sense for the contractor considering the judgment “One of the advantages of Chapter 11,” the company said in a statement, ‘is that it offered additional remedies, all of which have their own merits, to resolve issues in the field that wouldn’t normally have been available to Navillus.” O’Sullivan’s main concern through the turmoil was the company’s employees and hundreds of union workers, the company’s statement said. Navillus also indicated it was proud to continue in business as one of New York City’s biggest union employers—no small thing at a time when building trades unions are fighting to maintain their stature in the city. The regional building trades council, except for the carpenters’ union, is battling one of the city’s biggest developers, The Related Cos., over the next phase of its Hudson Yards project. Related wants to bargain with the unions on a one-on-one basis. And several unions in recent years have adopted what is essentially is a tiered wage system—another concession to their eroding bargaining power and market share. Quick Financing in Bankruptcy Loans to operate are often critical if a company is to survive bankruptcy. They must be arranged quickly. “Showing that sophisticated lenders have examined the debtor’s finances and believe in the debtor’s ability to repay its post-petition obligations … goes a long way” to quell worries about the debtor’s ability to continue, wrote attorney Paul H. Zumbro in a recent book about such lending But that is not exactly what played out, according to Navillus. The company said it was almost able to finance all of its own operations while in bankruptcy. Although the contractor’s surety, Liberty Mutual, provided a $20-million debtor-in-possession financial facility at a 3 percent interest rate, with no default rate and no fees, none of the DIP loan was used. After the DIP loan ended and Navillus emerged from bankruptcy, Liberty Mutual partially financed the settlement. Only a small number of Navillus creditors were forced to take reduced payments, the company also stated. As with other bankruptcies and litigation, the per-hour legal and consulting expenses needed to go through the processes were high, court records show. And Navillus is back in federal court, this time as a plaintiff seeking in new lawsuits several million dollars from several of the city’s biggest general contractors and New York City’s Dept. of Environmental Protection. The contractor claims in some of the lawsuits that the prime contractors and DEP are improperly withholding retained funds held back when it filed for bankruptcy protection. Other lawsuits began before the bankruptcy filing. Founded in 1987 as Navillus Tile, the company branched out from tile and masonry to concrete and has been a force in the city. At the time of the bankruptcy, the company had 640 union employees and 65 management-level staff. According to Navillus’ attorney’s statements to the bankruptcy judge, the company had an average annual gross income of $180 million, but 2016 gross income of $240 million. Its current cash and marketable securities at the time equaled $20.8 million, $12.2 million of which was cash. Its receivables were $55.3 million and it owed $13 million. Portions and details of this story were corrected Jan. 11 to show that no financing from surety Liberty Mutual is currently needed by Navillus and that only a small amount was used after Navillus’ bankruptcy. Corrections also clarified other aspects of the bankruptcy and civil lawsuit claim and settlement and the financial details about Navillus prior to the bankruptcy. https://www.enr.com/articles/46199-navillus-settles-into-normal-business-life-after-one-year-bankruptcy

Automation is set to transform commercial insurance lines with investments in this field expected to increase, particularly affecting the property business, according to a survey including 300 commercial insurers conducted by Intelligent Insurer. https://www.intelligentinsurer.com/news/automation-to-transform-commercial-insurance-survey-17437

The strategy chief for surety construction services talks about having the right people to prevent failures ENR recently exchanged email questions and answers with Gregg Lyon, chief strategy officer for Bond Construction Services, Strategic Initiatives and Product Management at Travelers. A graduate of Babson College, he has worked 28 years for the company in various underwriting and surety related posts. With a volatile stock market, interest rates slowly creeping higher and talk of an inevitable economic slowdown, the discussion revolved around contractor failure. Lyon talked about whether there’s anything new that can sink a construction contractor and what the best wisdom is for staying out of trouble. The questions came from ENR Deputy Editor Richard Korman. ENR What aspects of the economy or financial market performance are of most concern for Travelers’ surety and contractor clients? Lyon No surprise, but the biggest concern for our clients remains people. There continue to be headwinds to get enough of the right, qualified people to meet future business plans. The loss of people to other industries, the very low overall unemployment rate, and the lack of enough new people coming into construction will continue to present some significant business challenges to construction company owners. The issue second to people is public spending. The current environment is inconsistent in how it’s impacting our clients, with our heavy civil clients feeling the hurt much more than our general contractors. The private sector spending has been elevated the past few years, which has been good for our GC’s, but the lack of progress in overall public spending has made it hard for many firms, especially heavy/civil, to plan appropriately for their business. What are some of the most common reasons behind contractor failure / construction surety claims? We certainly are seeing common threads. We’ve been doing an annual review internally since 2009 where we look at our top 10 losses and do a deep dive to see what caused these clients to fail or default. Over those nine years, factors that have been big contributors to contractor failure include a problem on a project that ends up being too big, internal cost system failures, overextension and excessive debt. Tell us more about the problems and how they develop. The biggest thing we’re seeing is that one project or one bad decision can take a company down. More often than not, it’s a company taking on a job that’s a lot bigger than they’ve ever taken on before, working for an owner they haven’t worked for before or doing types of work they haven’t done much of before. Taking on a job that’s too far away from their area of expertise or doing a bigger job in a different location for a different owner can be a recipe for disaster. We all know that contractors are optimistic by nature. They know they can figure it out, but one thing we’re finding is that sometimes big problems can become too big to resolve. The best protection would be a healthy balance sheet or lots of cash? A good balance sheet certainly helps weather a storm, but even good balance sheets can get blown up with the wrong job. It’s become clear that every decision a company makes can have a material impact on its future. What’s the blueprint then for staying out of trouble? Is there one? A lot of companies do things really well, such as having good processes in place: who signs off on the decision to go after a job, who reviews the contracts, who makes the go/no-go decision. If you’re doing something a little bigger or different, you want to dig deeper, review the contract terms, look at the cash flow on the job, ensure the margin on the job fits the level of risk, and make sure that the risk-reward is in line with the overall risk appetite of the company. I think you’re talking about overextension in a lot of the mistakes you mentioned, right? Yes, overextension, especially when you’re maxing out your organization. That can mean from a cash flow standpoint or from a personnel standpoint. One thing I would tell contractors is to constantly assess their organization and know its strengths and weaknesses, know what its capacity is – and this is not a one-and-done process, it should be done on a frequent basis. That assessment should always start with people. Do you have the right people in the right places to handle the work you want to take on? Do they have the skill sets needed to carry that work out successfully? If you have the right people in place, coupled with the financial wherewithal to support your future needs, then the chances for success improve tremendously. What steps can companies take to improve their chances for long-term success? Thoughtful strategic planning is a good place to start. It’s not going to happen by chance. Try to come up with a good, solid strategic plan at least once a year, and then revisit that plan multiple times throughout the year. The key is to not put it in a bottom drawer somewhere and forget about it for a year or two. Rather, it should be used as a working document. Sureties and bond producers get very involved with their contractor clients and their businesses. You’ve told me that Travelers reviews bids and contracts, does accounting reviews and offers consultations and conferences. That’s a lot. Does every bonded contractor of Travelers get them or must they be purchased as add-ons? That is a lot. Our contractor clients have high expectations as to what they get out of their surety relationship, as they should. As a surety, we have a unique vantage point into the inner workings of thousands of construction firms, and we believe we can help our contractors be better at what they do every day if we pass on that knowledge. Ultimately, this benefits the client, our agent partners, and ourselves. This is why we spend so

As the construction industry in Canada becomes more prone to legal disputes, the need for robust construction insurance policies and surety bonding is growing critical in tandem. Insurance and bonding both play vital roles in ensuring both public and private construction projects are completed on time and on budget – two things rarely achieved by construction firms today. There are lots of issues that challenge the construction industry and contribute to project delays and over-expenditure. Like many sectors, the industry faces an impending wave of baby boomer retirements and a potential workforce shortage or gap as a result. It’s also contending with NAFTA tariff uncertainties, insecure revenue streams (building and repairing infrastructure isn’t cheap), and, of course, construction firms are up against the Canadian weather. At the height of a harsh Canadian winter, infrastructure wears out quickly and can be costly to repair and maintain. Other current construction trends include a tendency to amalgamate design processes with construction, and a push from Canadian municipalities to bulk construction projects together – both of which require construction firms to take on more risk, according to Scott Gilmour, partner at the newly-formed, construction-focused insurance brokerage, APEX Surety & Insurance Ltd (APEX). He told Insurance Business: “We’re seeing an increasing number of construction projects where some of the design is being passed along to the actual contractors. This is good in many ways because the contractors tend to be the experts in their fields – a roofer knows roofing better than everyone else and a plumber knows plumbing, etc. At the same time, adding that to your scope also means construction firms are having to take on some additional risk. If the design’s incorrect or faulty, they could suddenly find themselves facing significant liabilities. “Beyond that, there’s been a push lately by municipalities to bulk construction projects together. Whereas projects used to be tendered one at a time, giving firms a chance to bid for projects in isolation, now a lot of projects are being tendered in packages. As construction projects grow in size, there’s more opportunity for delays and budgetary issues. Suddenly, instead of trying to hit a single, construction firms are having to hit a home run – and the complexity of that task makes it more risky.” As the complexities in the construction industry grow, companies are turning to their insurance partners – brokers and carriers – for more tailored support. This is why Gilmour and four other partners decided to set up APEX, which they claim is Winnipeg’s first insurance brokerage with a specialized focus on surety and the construction industry. Together, the five partners offer a combined 60-years of experience in construction-specific insurance, with backgrounds in law, accounting, banking and construction management. “In the past decade, lots of construction risks have been placed through programs or bulk purchasing arrangements,” Gilmour commented. “At APEX, we want to provide a more bespoke, custom approach to each client, regardless of their size. When we looked at the brokerage landscape in Winnipeg and Western Canada, we felt there was room for an additional entrant that was more focused on construction and surety. The Prairie provinces have some of the fastest-growing economies in Canada and they’ve seen some significant infrastructure projects in recent years, including the Keeyask dam project in Northern Manitoba and the oil and gas pipeline projects in Alberta and Saskatchewan. It’s an excellent market for the construction industry and for construction insurance as a side.” https://www.insurancebusinessmag.com/ca/news/construction/construction-firms-forced-to-take-risks-and-go-for-home-runs-121950.aspx