Home > BuildPay News > Demotech: Irma, Queen of the Tile

The Demotech Difference Summer 2019 Issue was released August 1st and featured an article written by BuildPay CEO, Steve Wightman, that focuses on the dysfunction of the construction supply chain.

An excerpt from the full article is below.

On the morning of September 10th, 2017, Hurricane Irma made landfall in Florida at 130 mph, ultimately causing more than $10 billion of insured property losses, much of it involving tile roofs.  According to Construction Executive magazine, Governor Rick Scott’s office quickly reached out to the Associated Builders and Contractors (ABC) trade organization to seek input on what could be done to enable the most prompt and efficient recovery effort.  Governor Scott asked the right question, but even if you ask the right question in the eye of a hurricane, does it make a sound?

The roofing industry was certainly tested by Hurricane Irma. Several Florida counties reported an increase of more than 1,000% in monthly roof permit requests.  Irma’s unique signature was excessive tile roof losses.  The information and inventory that the supply chain needed for any hope of efficiency was unavailable.  In many cases, tile roofs with only a few broken tiles were being fully replaced because the specific tiles needed to do repairs were “no longer available.”  Often the needed tiles were actually available, but couldn’t be found inside the dysfunctional construction supply chain.

To be fair, Irma is not the first catastrophe to have been affected negatively by dysfunctional reconstruction processes.  The results of catastrophe dysfunction are higher prices and slower recovery.  Most of the blame for this is placed on “demand surge,” shortages, mortgagees and overburdened adjusters.

 

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Lenders: Competitive Advantage


The golden rule sums up lenders’ advantage the best. “Whoever has the gold, makes the rules.”  While the bank has the gold, they compete with other banks, who also have the gold.  Their rules are necessary, they do not need to be changed.  There are many companies that argue the execution of the rules are inefficient, but efficiency really does not substantially improve protections for banks or add construction success for customers.  A shared ledger allows banks - as the trusted source of project funding - to set the rules for project payment releases, monitor the project health and all but eliminate any chance of lien.  Cash-flow-lubricated projects attract competition to accelerate work at more competitive prices with superior protections for virtually every player in the chain.

Insurance: Competitive Advantage


Insurers’ obligation to pay is the most potentially powerful tool insurers have, but is very difficult to systematize and scale given the daunting challenges of insurers collaborating with a huge, highly fragmented and complex construction industry.   Since all construction has chronic payment risk and inadequate cash flow, it makes sense for property insurers to use their irrevocable obligation to pay to attract the construction industry.  Since cash flow is most attractive at the project level, inter-industrywide collaboration between insurers and the titans of construction is less important than mechanizing a platform that can be scaled from one project to many thousands of projects.

Government: Competitive Advantage


In some cases, opportunity for small subcontractors (with limited financial wherewithal) is only one part of the total equation.  Some very talented and well run companies still cannot automatically get the trade credit, working capital and cash flow they need to keep pace.  The struggle is unnecessary when the government funding source can allocate contractor-planned and approved payouts directly to these subs.  Similarly, the subs themselves can allocate material budgets to the ledger to enable them to procure all the materials they need without the material provider taking on risk.  Working capital constraints are greatly alleviated, cash flow accelerates and there is no need for trade credit.  Government agencies can see activity on the ledger for each bid project.  Bids improve.  

Why would construction lenders need to change their highly refined processes?


Success for construction lenders means providing their customer with the funds needed to build the project they want.  To protect the bank’s interests, protective draw schedules are put in place to assure the project is done – and done without liens.  Albeit necessary protection, slow draws cost project time and money.  Some oversight, work and material providers avoid working on bank-funded projects, charge more or require large owner-deposits. This is especially true for classes of product that are fabricated offsite and installed after fabrication is complete, when providers are still not paid until after the next draw.  Customers pay interest on capital needed for construction, with process requirements attached that add to the construction cost and delay project delivery.  In a world where settled business models (think taxis) can be unsettled in months (think Uber), this one probably has disrupters’ attention.

Why do property insurers need to change?


Success for property insurers is making their customer whole as quickly as possible and protecting their loss ratio from significantly inflated reconstruction payouts; especially overblown demand-surge prices following disasters.  Insurance reconstruction is the most inflated of any type of institutionally funded work and is getting worse.  Claim departments are startled by the rate of new disadvantages to mitigate, using tools that have not been substantially redesigned in decades.

Why would government funded projects need payment changes?


Many government entities endeavor to help smaller subcontractors and material providers have the opportunity to be awarded contracts.  In some states women and minority owned enterprises are guaranteed a portion of publically funded construction.  Most contractors we talk to are supportive of this mandate, but it comes with unique challenges.  Providing opportunity alone does little to help solve problems with deficient working capital, trade credit at material providers and enough rapid cash-flow to keep up with fast-paced project schedules.  In some cases contractors help these subs as much as possible, but obviously there are some challenges beyond their control.  These problems work their way to the top like air bubbles in concrete.