Profit margins are tight in the construction environment, making it difficult for small and medium-sized firms to compete with the big national and international construction companies who can use project bundling or public-private partnerships to look more attractive.
Some of these large construction companies then hire local contractors and opt for subcontractor default insurance instead of securing bonding or surety. This pressures the small contractor to assume more risk and less control over the project. As McConnell points out in the article, “smaller companies have to negotiate with big contractors to get work, which can mean tactical moves to gain favour with the big players.”
According to a Surety Association of Canada report, “Contractors with distressed balance sheets may become overly aggressive in their efforts to obtain work, thus creating the vicious downward cycle, which leads to insolvency.”
A trend toward bundling projects also negatively impacts smaller companies. Stephen Bauld, who served as the vice-president of the Ontario General Contractors Association for four years, explains that bundled projects require a large bonding capacity, which eliminates many smaller companies, who do not quality for bonding a larger sized project. In addition, bundling can reduce the number of bidders and drive up project costs.
Many small and medium-sized construction firms would have more opportunities to compete if they could bid on individual projects being built one at a time and be able to secure bonding.
McConnell goes on to explain that the decline in traditional bonding due to P3 or bundling projects also means that transparency is disappearing. A P3 project takes the government out of the decision-making process and instead “politically strong and influential” companies have control and are not compelled to publicly reveal financial details.
Smaller jobs in roadwork and waterworks are areas where the small and medium-sized construction firms can still flourish. “The bonding industry will always be around,” says McConnell. “We are coming out of a recession and it’s hard for companies that haven’t been around for a long time. But, smart people, people who work hard, do well.”