How contractors can improve cash flow and profitability
Contractors are continually facing increased pressures on profit margins and cash flow due to a highly competitive environment, delays in payments, economic pressures delaying project start-ups and high labour costs.
To remain competitive in the long term, contractors have the opportunity to look at where their risk management and insurance program might be causing them to lose money in either cash flow or reduced profits.
Marsh Advisory has identified the following seven areas within a risk management program that could be impacting the profitability of a contractor’s business.
1. Insurance limits
Insurance limits may be too conservative, resulting in contractors paying premiums for limits they are unlikely to need.
2. Excesses
If excesses are set too low, contractors may be placing profit back into the hands of insurers when it may be more profitable to retain more of the risk.
3. Differentiation to insurers
How a contractor manages their construction risk may not be communicated effectively to the insurance market. Unclear submissions can reduce an insurer's ability to differentiate a contractor's business from their peers and therefore impact their ability obtain better premium and capacity.
4. Policy wording
Some policies may not contain agreed KPIs relating to the progress of payments from insurers. This can mean that a contractor may have to have to wait for a longer timeframe than anticipated for their claim settlement.
5. Delays in claims payments
Where claims are handled by non-construction specialists, unnecessary delays in settlement can result. In some cases, a lack of understanding of a contractor’s needs may also result in payments that are lower than otherwise obtainable.
6. Sub-contractor performance
Uninsured risk from sub-contractor default, quality issues and delays can erode profitability.
7. Liquidated damages claims
We have seen some instances of principals using liquidated damage clauses too aggressively to withhold payments and squeeze contractors’ profit margins, knowing that contractors often have limited resources to lodge a sophisticated defence quickly.
