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Rising construction business increases risk of subcontract defaults


LAS VEGAS — The U.S. construction sector is poised for another year of growth, but general contractors need to do a better job of minimizing the risk of subcontractor defaults.

U.S. construction starts are projected to grow 6% to $712 billion in 2016, following gains of 9% in 2014 and an estimated 13% in 2015, according to Washington-based Dodge Data & Analytics.

Charles Bacon, chairman and CEO of mechanical and maintenance specialty contractor Limbach Facility Services L.L.C. in Pittsburgh, told attendees at the International Risk Management Institute Inc.'s Construction Risk Conference, that his company's pipeline is healthy amid a backlog of post-recession projects.

“The prospects for 2016 are very strong,” Mr. Bacon said Tuesday, cautioning that he is concerned about 2017 and 2018 because the Federal Reserve may raise interest rates. “Its clear that it's coming.”

“There's plenty of work out there — probably more work than one industry can handle,” said Thomas Gilbane, chairman and CEO of developer and contractor Gilbane Inc. in Providence, Rhode Island. “We see no slowdown.”

But general contractors will have to guard against subcontractor defaults, they said during the IRMI conference in Las Vegas.

After two defaults in the past two years, Mr. Bacon said Limbach has implemented a more rigorous prequalification process, which he said previously was lax.

One risk management step Gilbane is examining, in partnership with its subcontractor insurance provider Zurich, is using data to monitor and guard against the aggregation of work for any particular subcontractor, Mr. Gilbane said.

“How do we make certain we're not giving any one subcontractor too much work?” he said.

Mr. Gilbane has not had many subcontractor defaults recently, but is looking for ways to eliminate them, he said.

“On the one hand, I think we’re doing a good job of financially prequalifying our subs,” he said. “But we we’ve got to do a better job of tying in their safety records and their performance on prior jobs.”

“I think defaults are going to go down,” he added.

Contractors also have to be willing to say no to clients, they said.

Mr. Gilbane said his company terminated a relationship with an unidentified institutional organization for such failings as not paying its bills on time.

“There are some things we just need to be more cautious about,” he said.

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