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Public Construction, Prepare for the Worst Hope for the Best

Just when you thought it was safe to go outside again….The construction climate has been steadily improving since the depths of the great recession.  A lot of your competitors did not make it through these turbulent times so the bid lists are reasonable again.  Most contractors are even starting to make a little money.  Private construction continues to improve, especially in the multifamily housing and healthcare sectors.  What could possibly go wrong now?

First, the Federal Government spending is going to be slashed and construction dollars will not escape the automatic cuts that are coming.  Our congress lacks any real leadership so they are bound by the automatic cuts negotiated as part of the deal to raise the debt ceiling.  The automatic cuts will affect all discretionary spending, and this ultimately means construction spending will be affected.

As troubling as that is to the construction industry, the continuing issues facing municipalities can have an even greater negative impact on public construction.  We’ve all seen the headlines about major cities defaulting on obligations with some even filing chapter 9 bankruptcies.  The ripple effect on the entire municipality debt markets will negatively impact public construction for years to come.  Borrowing costs increase, the entire municipal bond market is out of reach to many municipalities and defaults will continue to increase.

Planning for the worst means be ready to cut the overhead again.  Maintain your ability to obtain performance and payment bonds by keeping your balance sheet strong and clean.  While the surety industry continues to be open to new opportunities, as the industry sees increased risk factors, it will respond with increased underwriting scrutiny, especially if the contractor is largely dependent on public construction for its revenue stream.

Plan for the worst, hope for the best……


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