Bonding requirements put glaziers under scrutiny
Still faced with highly competitive market conditions and low profit margins, contract glaziers report another growing concern: more projects are requiring bonding, and that bonding is becoming more difficult to secure.
"Bonding is important now," said John Kane, executive vice president for general contractor HITT Contracting Inc., www.hitt-gc.com, during the 2012 BEC Conference in Las Vegas. "In this economy, we do a lot of pre-investigation work of subcontractors—we're looking at financial health. ... Bonding companies are the first to know if someone is in trouble. They may know before you even know."
"The rate of your bond is an indication of financial liability. We require [companies] Closer look to be bondable," added David Bellman, senior vice president of developer AvalonBay Communities, www.avalonbay.com.
The requirement for bonding is a result of the continued difficult construction environment; bonding provides critical protection for the owner and general contractor when a project player goes under during the course of the project.
The recent closure of two high-profile glazing contractors—ASI Ltd. in December 2011 and Trainor Glass in February—has magnified the issue of project bonding, according to industry officials.
After ASI closed, Hunt Construction Group worked with insurer Ohio Farmers to get the ASI plant running again to complete the glazier's work on the façade of Barclays Center, part of the major Atlantic Yards development in Brooklyn, N.Y. Bonding companies also were brought in to complete several large jobs that were unfinished when Trainor shut down. The bonding company for Trainor's Firekeepers Hotel & Event Center project in Battlecreek, Mich., paid United Architectural Metals the $1.2 million it was owed when the glazier went out of business.
"When the economy was good, bonded work wasn't being paid much attention, as it was a cost to the owner," says Scott Clymire, vice president, United Architectural Metals, www.unitedarchitectural.com.
"People started relaxing on labor bonds, performance bonds, and the industry was seeing a lot of non-bonded work." The recession fallout has changed all of that. "Since the ASI crash, we are seeing bonded work only," Clymire says.
This development verifies the predictions of several glazing industry representatives. "There is the tendency for the market to tighten in reaction [to sudden company shutdowns]. Developers get edgy about implementing new projects, bonding and insurance gets tougher, [and] there is a general increase in caution and scrutiny that just makes an already tough market tougher," said Mic Patterson, director of strategic development for Enclos Corp., www.enclos.com, shortly after Trainor closed its doors.
Jeff Haber, managing partner, W&W Glass, www.wwglass.com, agreed. "Every bonding company is going to start tightening the leash. They are going to start raising the capital requirements, and general contractors are going to be more selective as to who gets work," he said. "This will be painful in the short term. ... It might expose a few more [contract glaziers] that are in bad shape."
Tightening the leash
Several glaziers report they have started to see the expected tightening in the surety market since February, and it is having a very real effect on companies. "If you have been struggling financially and you're having trouble getting bonds for your projects, don't be surprised," says Rod Van Buskirk, president of Bacon & Van Buskirk, www.bvbglass.com.
Glaziers oftentimes face more stringent bonding requirements than other subcontractors on a project. "Surety underwriters will tell you that [contract glazing] is one of the highest risk industries in the building trade," Vic Cornellier, CEO at TSI/Exterior Wall Systems Inc., www.tsiwalls.com, said during the BEC Conference. "Some bonding companies won't touch this industry."
Part of the reason for this is the glazing contractor business model. "Most subcontractors don't have the overhead levels we do," says Courtney Little, president, ACE Glass Co., www.aceglass.net.
Matt Stephen, bond state agent for the Cincinnati Insurance Co., www.cinfin.com, adds that warranties might also play a part in the more stringent requirements. "Whenever you see glass and glazing, the first question is 'how long is the contractor's warranty?'" Stephen says. "I would assume [glaziers] are held to higher underwriting standards because they are mostly subs on the work they perform, and they seem to have extended warranties associated with their work."
Bonding companies are looking at income statements, balance sheets and gross profit margins, Little said during BEC. "Bonding companies want you to have a year's income stored up," he said. "If you're making profits, you should be increasing your assets. You have to have assets to cover the tough times."
Additionally, glaziers need to keep track of their long-term debt. The companies that "go down are those that can't make enough to service the debt they've acquired over the last couple of years," Little said.
To secure the bonding they need, glaziers need to prove they have cash on hand and are working at profitable margins. "Make money, have adequate working capital and net worth to support your program," Stephen recommends.