How contractors can improve cash flow and profitability

Marsh Advisory has identified seven areas of a risk and insurance program that construction contractors could review to improve cash flow and profitability.

construction worker looking up metal platform

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.

Contact us to find out how we can help your business

How Marsh can help

  • Analytics on the optimal excesses and insurance limits to ensure you are not being too conservative with risk retention and determine the ideal balance between risk coverage and premium savings.
  • Detailed underwriting submissions that clearly articulate your risks and risk management practices to reduce underwriter uncertainty and create clear differentiation between you and your peers.
  • Pre-agreed policy wording with insurers on the timing of progress payments to make sure cash flow is not hindered by excessive delays.
  • Experienced construction claims specialists who understand your needs and can move quickly to maximise recoveries.
  • Sub–contractor risk identification and risk maturity assessments to identify critical sub-contractors, independently assess their viability and risk maturity, predict their performance on your project and help you identify and manage performance issues before they arise.
  • Project delay specialists who can quickly identify the root causes of project delays and how much each cause contributed to the delay (as a percentage) and ultimately the allocation of liability. This helps support contractors to defend liquidated damages claims (when appropriate) and to reduce or remove any financial penalties without incurring expensive legal fees.

Get in touch for a review of your risk and insurance program.

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This publication is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Marsh shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any modelling, analytics, or projections are subject to inherent uncertainty, and the Marsh Analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change. LCPA 22/253

Marsh Pty Ltd (ABN 86 004 651 512, AFSL 238983) (“Marsh”) arrange this insurance and is not the insurer. The Discretionary Trust Arrangement is issued by the Trustee, JLT Group Services Pty Ltd (ABN 26 004 485 214, AFSL 417964) (“JGS”). JGS is part of the Marsh group of companies. Any advice in relation to the Discretionary Trust Arrangement is provided by JLT Risk Solutions Pty Ltd (ABN 69 009 098 864, AFSL 226827) which is a related entity of Marsh. The cover provided by the Discretionary Trust Arrangement is subject to the Trustee’s discretion and/or the relevant policy terms, conditions and exclusions. This website contains general information, does not take into account your individual objectives, financial situation or needs and may not suit your personal circumstances. For full details of the terms, conditions and limitations of the covers and before making any decision about whether to acquire a product, refer to the specific policy wordings and/or Product Disclosure Statements available from JLT Risk Solutions on request. Full information can be found in the JLT Risk Solutions Financial Services Guide.”