Product Update

Contractor Financial Review, Cash Flow Budgeting, and a Construction Contract Review Checklist in CRM

This release of Construction Risk Management (CRM) includes updated discussions of contractor financial review for contract bond underwriting, cash flow budgeting, and an updated construction contract review checklist.

Contractor Financial Review

The starting point of a bond underwriter's information-gathering process is an in-depth financial review of the contractor. The procedure for evaluating a contractor's financial statements is both detailed and complex.

Similar reviews are increasingly common in casualty insurance lines and subcontractor default insurance, especially where significant retentions are contemplated under the policy. While this analysis focuses on financial reviews for contract bond underwriting, the basic principles are also applicable to other forms of contractor insurance.

Cash Flow Budgeting

Contractors that manage their cash flow properly are more likely to succeed and less likely to fail than contractors that don't. This well-understood fact is why construction financial professionals commonly repeat the maxim that cash is king. A contractor's cash flow budget is a representation of how much cash will be needed to finance ongoing operations and when it will be needed. At its core, cash flow budgeting is a two-step process that consists of preparing a projection of cash flow (a cash budget) and using that projection to monitor and control actual cash receipts and expenditures.

Construction Contract Review Checklist

In an ideal world, risk management professionals will be brought into construction contract review before the documents are signed. In that situation, a construction contract review checklist is a useful tool for protecting the contractor's interests by ensuring key provisions are examined and unfavorable contract terms and conditions are avoided. Often, however, risk managers are handed an executed contract and asked to make sure all of the needed insurance coverages are in place. In that case, a checklist can help identify significant risks and to plan accordingly.