Construction Costs, Insurance, & Risks Surviving in an Expanding Market Pete Kelley, VP – Florida Operations Curtis Long – Senior Project Manager

Presentation Summary Bonding & Insurance Nature of Construction Costs –Labor –Materials –Equipment –Subcontractors Risk Contingency Evaluation

Bonding & Insurance Payment & Performance Bonds –Current Construction Market Explosive Growth Profits Up

Bonding & Insurance AGC –Construction spending in March ’06 set a record for the 8 th straight month - $1.2 trillion seasonally adjusted –Construction spending was 9.2% higher in first quarter compared to ’05 –40% increase in multi-retail centers/”Big Box” –Public sector 1 st quarter results Educational – 14% Highway & Street – 7.7% Sewage & Waste disposal – 28%

Bonding & Insurance Superior Construction Growth

Bonding & Insurance Payment & Performance Bonds –Current Construction Market Risk down Life is Good … Right???

Bonding & Insurance Payment & Performance Bonds –Then Why Are So Many Companies Struggling??? –Jan ’01 to Sept ’05 the surety industry sustained losses exceeding $11.9 billion

Bonding & Insurance Why Contractors Fail –Unrealistic Growth - Expansion in Volume, Type of Work or Geography –Performance Issues - Lack of Experience in Job Size, Complexity or Type –Character Issues - Problems Which Distraction Key People: Divorce, Senility –Accounting Issues - Inadequate Internal Accounting; Costs Not Posted Timely. –Management - Weak Management at Upper or Field Level. –Large Project Concentration –Non Construction Activities - Money & Time –Geographic Spread - Unfamiliar Subs, Labor –Inadequate Profit Margin –Subcontractor Problems –Unapproved Change Orders –Other - Owner Financing, Excess Equipment, Insurance\fidelity

Bonding & Insurance Bid Bond - Guarantees that if you are low or successful bidder you will enter into a contract and execute the required performance and payment bonds. Performance Bonds - Guarantees that you will perform the obligation as require by the contract in accordance with the plans and specifications. Payment Bonds - Guarantees that all vendors, and laborers will be paid

Bonding & Insurance Historical Surety’s Assessment 3 C’s Character - Morals and Ethics Capacity - Performance Record, Equipment, Credit, Management continuity, etc Cash\Capital - Working Capital, Net Worth, Debt, Over and Under-billings

Bonding & Insurance Surety Benchmarks –Working Capital 3%-10% of Aggregate –Net Worth 5%-20% of Aggregate –Gross Profit 5-10% –G&A Expenses 4%-8% –Net Profit 1%-2% –Debt to Equity < 3:1

Bonding & Insurance Managing the Surety Relationship –Provide Standard Information Timely –Discuss Strategy - Silent Partner –Clear Specs - Reconcile All Schedules With Financial Statement & Educate on Risk Evaluation –Provide In-depth Data on Projects and Organization –Prepare Business Plan & Budgets –Minimize Job Profit Fluctuations –Project 100% Complete & Underbilled Red Flag –Open Projects GPM Higher than Completed Jobs –Underbillings > 25% of Working Capital –WIP does not Reconcile with Income Statement –Educate your Surety

Bonding & Insurance Payment & Performance Bonds –What Do Sureties Focus Expansion Risk Subcontractor Default Exposure Contract Duration Warranty & Maintenance Periods Liquidated Damages Levels Consequential Damages Provisions Materials Escalation/Industry Inflation Bond Forms Residential Projects Continuity Planning/Ownership Transfer

Bonding & Insurance Insurance –General Liability –Workers Compensation –Automobile –Builder’s Risk –Professional Liability –Umbrella

Bonding & Insurance Insurance –General Liability Must have policy Market stable for companies with good loss records Do not be under-insured –Workers Compensation Safety First is not just a catch slogan For every $1 in direct WC costs you will experience an additional $ xx in indirect costs e.g. – a accident with $25k in medical costs will cost you approximately $100k

Bonding & Insurance Insurance –Automobile Company vehicles are a significant risk/exposure Non-business related travel Interaction with the traveling public –Builder’s Risk If it is not required contractually – do you carry it? Premiums are significant with large deductibles

Bonding & Insurance Insurance –Professional Liability Relative newcomer to the insurance portfolio of contractors Necessity brought on by the proliferation of design/build work Necessary even if engineering done by a consultant Necessary even if “Design/Engineering” is not performed by the contractor or construction manager

Nature of Construction Costs Labor –Quantity Single greatest limiting factor to growth is the availability of skilled labor –Quality As construction professionals we must train younger workers and promote our industry

Nature of Construction Costs Labor –Cost Escalation Factors Competition from other contractors Competition from other industries

Nature of Construction Costs Materials –Cost of materials has historically been stable –Vendors typically would hold pricing for the duration of a contract –Currently, vendors won’t hold pricing for more than 30 days

Nature of Construction Costs Materials –Steel Chinese demand, Buy-American clause –Concrete Cement & Aggregate shortages –Asphalt Shortages across the board – aggregate, liquid asphalt, –Dirt Widespread development has driven land costs to the point that it is no longer feasible to put a borrow pit on real estate near a population center

Nature of Construction Costs Equipment –Steel –Technology –Labor –Rubber –Demand

Nature of Construction Costs Subcontractors –Transfer of risk does not eliminate –Consider all factors when selecting subs Work history together References Risk associated with the scope of work “How low are they” – consider a bond

Nature of Construction Costs Market Analysis –ENR Producer Price Survey Ready Mix Concrete – up 11.9% Aggregates – up 9 % Cement – up 14.9% Asphalt – up 19% Construction Machinery – up 5.4% Labor – up 3.4% –Local Conditions June ’03 – Dec ‘05 Ready Mix Concrete – up over 50% since June ’03 Labor – up 15.7%

What Does it All Mean RISK !!

Risk Contingency Evaluation Project Identification Owner Identification Internal Labor Supply Material Cost & Supply Issues Subcontractors

Risk Contingency Evaluation Owner Identification –All owners are not the same Focus estimating efforts on projects with owners that foster a profitable relationships –Owners do not stay the same Corporate/agency attitudes often reflect those of top management Relationships can and do change with changes in upper management Relationships can change with geographic movement

Risk Contingency Evaluation Project Identification –Select only those projects that fit your skill set and do not force inordinate risk to your company

Risk Contingency Evaluation Internal Labor Supply –Analyze current projects and upcoming work –Consider contingency for projects with extended durations, i.e. – greater than 12 months –Projects in remote areas should have special consideration given to availability of resources and prevailing wage

Risk Contingency Evaluation Material Cost & Supply Issues –Material supply can no longer be taken for granted –Contingencies and escalations must be strongly considered for the following cases Projects over 4 months in duration should have significant consideration for escalation Materials that may be susceptible to supply shortages should have consideration given to stockpiling materials Projects in remote, less populated areas require particular attention with regard to material supply

Risk Contingency Evaluation Subcontractors –Be selective with subcontractors –Consider bonds on subcontractors with limited work experience, large scope of work, or technical scope

Construction Costs, Insurance, & Risks Surviving in an Expanding Market Summary