Backlog Doesn't Equal Growth: What Contractors Get Wrong About Risk Management

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ℹ ABOUT THIS EPISODE

Every contractor thinks growth is about backlog, but it's actually about how much damage your business can take without folding. 

Wade Carpenter and Stephen Brown reveal why insurance isn't just another cost, it's your growth engine. 

Learn how proper risk management unlocks bonding capacity, protects cash flow, and turns insurance from a necessary evil into a competitive advantage. 

Discover the critical mistakes that kill contractor growth and how to design your business around risk instead of avoiding it.

⌚️ Key moments in this episode:

• 00:00 Introduction to Contractor Growth and Risk Management
• 00:28 The Role of Insurance in Managing Risk
• 02:25 Starting with Basic Insurance Coverage
• 03:52 Growth Challenges and Risk Mitigation
• 06:02 Advanced Insurance Strategies for Contractors
• 07:13 Insurance as a Tool for Market Access and Bonding
• 08:59 The Importance of Proactive Risk Management
• 17:36 Conclusion and Final Thoughts

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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

Transcript

[00:00:00] 

Wade Carpenter: Every contractor I know thinks growth is about backlog. It's not. Growth is about how much damage your business can take without folding. That's an insurance problem, whether you like that word or not.

This is the Contractor Success Forum. I'm Wade Carpenter with Carpenter & Company CPAs, alongside Stephen Brown with McDaniel Whitley Bonding and Insurance. Today we are talking about making sure your hard work doesn't get destroyed by not protecting it properly. Stephen, what are we getting into today? 

Stephen Brown: Wade, we're really getting into a key element of running a construction company and that's managing risk. Who else helps you manage risk? That's insurance carriers. They help you manage that risk and the whole purpose of this podcast is to help our listeners remind themselves what these risks are and whether they're managing it proactively.

Because I would say that a good manager of this risk, in regard to your insurance programs and the amount of losses or retentions [00:01:00] you may take on a risk, what you can ensure, what you can separate.

All these are key elements that especially as we're going into New Year 2026, we're looking at folks thinking, okay, what elements do I need to think about moving forward for my company? Insurance is a big part of it.

Wade Carpenter: Yeah, and just as you said, most people don't want to have to deal with their accountant, but when they do, if they're helping them grow, they think about the same thing. Insurance is just another cost. If that's the thought, that's the wrong thought.

The ones that really lean into it see growth is really limited by risk capacity, not their backlog. Let's talk about how growth can be affected by not properly insuring.

Stephen Brown: Wade, from my perspective as a broker, I'm trying to put together a package for an insurance carrier that'll get you the best prices available. And what gets you the best prices available is having the best risk avoidance procedures in place to not having a [00:02:00] claim.

If you put yourself in the place of an insurance underwriter for a little bit and you think about their perspective, it's almost impossible to do. You are not an insurance underwriter, but your broker works with them all the time.

From what we see, their perspective on how you run your company depends on how much risk they're willing to insure you for. My point in this podcast is good contractors manage risk and insurance is a part of it.

So Wade, you start off your insurance company and you basically get the coverages that you have to have. By law you gotta have some coverage on your truck. If you have five or more employees, you might be required by the state to carry workers' comp insurance. And then you're gonna need insurance depending on whatever owner requires you to have.

So many contractors starting off, they're like, hey I'm thinking about doing this contract with so and so, here's their insurance requirements. How much is this gonna cost, Stephen? It's gonna be higher because you don't have any procedures in place to get a [00:03:00] better price.

I usually help you get those procedures in place. Starting off, you got to have a good subcontract agreement. You gotta have hold harmless agreement language in there. You've got to have some controls over your employees as drivers and as workers for their safety.

You gotta have a fleet management program on your vehicles. Even if it's one vehicle, they wanna see that you've got procedures in place. Because they can have just as big a claim on one vehicle, is that they insure a hundred.

So these elements are all in place. Starting off as a small contractor with a small business owner's package, this may not matter that much to you, but as you grow, you realize that these risks that everyone's asking you about in order to get you higher insurance limits required on a certain project are really something that you should be thinking about all the time. 

Wade Carpenter: Yeah. Can you talk to us a little bit about where growth actually breaks? I'm thinking about okay, a subcontractor defaults, or [00:04:00] you have a auto liability, you know, you have one wreck and that can derail a lot of best laid plans.

So what are some areas that you can talk to us about where growth might actually be broken by not properly covering the risks? 

Stephen Brown: First, 

First of all, it's by not having adequate limits of coverage in place. We're just seeing higher and higher claims, so that's a huge part of it.

But also, what about the things that you can insure, and what about the things that you can't insure? How do you deal with that? So in the construction insurance world that I'm involved in, there's all types of products and coverages depending on what your risks are, and you have to communicate that to your agent.

Subcontractor default insurance policies, SDI it's called. Managing your subs. There's auto insurance, there's the umbrella coverage. How much do you need? How much is enough? How can you price yourself out of business by having too much coverage? If I can't afford this much coverage, what do I need to [00:05:00] do to minimize my potential risk so I won't have a claim there?

This is the key to construction. Think also about growth killers that will hit you like a ton of bricks. When you have a subcontractor go under or they have a claim that isn't covered. As a general contractor, you're responsible for that subcontractor. So you were totally involved, not only with the claim, but getting that subcontractor replaced to get the project going back and a proper timeline for completion. So you got that going on.

Then you've got the whole risk involved with your equipment breaking down proper insurance on your equipment. Also key components to your construction project that fail, are faulty, or not delivered on time. You got that risk as well. So how do you mitigate that?

We talked earlier about maybe supply bonds as a way to mitigate that particular risk. But no matter how you look at it managing this risk as a key to growth. Are there any other growth killers you were thinking [00:06:00] about that I didn't address so far? 

Wade Carpenter: Yeah, I know you talked about project aggregation risk and most people may have no idea what that means. Things like retentions that might be over and above your cash flow. But let's start with a project aggregation risk. What is that?

Stephen Brown: Project aggregation risk has to do with your backlog of overall work. As you take on more projects and you have a backlog of work that's being done, you have an aggregation of risk that goes up. Have you accounted for that in your insurance? That's a good question, isn't it?

What do you mean by, have you accounted that in insurance? If you look at whether you have adequate coverage in place, is there some certain risks that you might wanna get some insurance on now? What about if I have a builder's risk insurance policy and there's been significant change orders to that project? I need to bump that policy up. I may not have thought of that. That's just an example of [00:07:00] aggregation of risk due to just growth backlog.

Wade Carpenter: Yeah, and I know we talked about too, the retainage and stuff like that. You wanna make sure that things are covered and you're able to finish out the job.

But one of the things I would like to kick around is, using insurance as a way to access a certain market, like getting into larger jobs or getting that bonding capacity. Insurance is so key to that.

Stephen Brown: Absolutely. I have to remind a lot of bonding underwriters all the time that some projects are really insurance driven, and I'll explain specifically why. You as an underwriter only understand the financial capacity of the company to bear losses, right? And so you're making a decision based on that.

But what if insurance considerations are everything on this particular project? What about the weather? What about the location of the project? What about the risk? What if it's a design project and you wanna mitigate some of those risks [00:08:00] by professional errors and emissions coverage on the designer? Or what if you are the designer and you're hiring a subcontractor to do that design work?

That again, is another issue where insurance is maybe more important than bonding. What about pollution liability coverage? What about other professional liability coverage? What about cyber type coverage?

We've talked about contractors building these data centers or doing hospital work doing highly complex mechanical systems that are involved. All these things change. You understand what you're installing. You understand the risk, but then again, the more complicated it is the more risk you might have.

So you can just look back and say what have I got going on in my backlog of projects and what I'm thinking about doing in the future that maybe I haven't talked to my agent about? And do something about it. It's a team effort, isn't it? 

Wade Carpenter: Yeah, absolutely. [00:09:00] And if I could, I'd like to go back to the retainage risk, because I think that's such a big key thing in your cash flow. And it's something that's sitting there living on your balance sheet.

If it's been sitting out there, a year or two, when are you gonna get that? There's some risk that you're not gonna get that kind of stuff. They've transferred the risk to the contractor and what can we do about it? I know it's something like can we predict when we're gonna get this money? Insurance is not gonna eliminate the risk, how can that help?

Stephen Brown: The insurance, especially on a bonded project, there's a 12 month warranty on the workmanship that you do. So why are you even holding my retainage? I bonded the project. It guarantees that I've done the project according to the contract and there's a 12 month warranty on my workmanship.

If the project involves roofing, for example, you not only have the warranty from that bond for 12 months on the workmanship, but you also may have another warranty on the installation and the product itself from the roofing manufacturer. So as [00:10:00] an owner, you're gonna want to get that as well, right?

Then there's retentions that you take on, not retainage, Wade, per se money that the owner is holding back. Five or 10% retainage on it, but there's also deductibles and retainage on your insurance. The reason I bring that up is that a lot of these wind hail deductibles in certain areas of the country can be as high as five or 10%.

So you're riding a builder's risk on a building. You're building on a coast somewhere, and you've got that huge amount of deductible or retainage for wind type claims. How do you build that into the product? That's a huge amount of risk that you're undertaking. So you just need to be aware of that as well. 

Wade Carpenter: It's so true. I guess I would also change direction a little bit too. Because if we're talking about insurance as part of your growth, I know I've seen owners where, insurance is basically a signal of the quality of your company.

It tells you something. If you're like, having one of these ghost [00:11:00] workers' comp policies or your poorly rated bond program. I do think there is something to be said about that. Having quality insurance in place, it's compounding your profit. It also makes sure that you hold on to what you--

Stephen Brown: As I look at insurance certificates, for customers of mine I usually get an email with a copy of it. How's this look? Is it good? I know what you as a company require from your subcontractors, but I can look at a certificate and I can tell a whole lot about that particular company, just from the insurance coverages they have or don't have.

The companies that they're with, the reputation and stability of those particular insurance carriers. All this is important. Having proper limits in place will tell an owner and an owner's representative you're used to doing these bigger projects. You're used to the risk involved.

What I see a lot Wade, is certain contractors, for example, demolition contractors that the owner will put a [00:12:00] huge umbrella liability limit to protect themselves. And the demolition contractors say no. We don't, we don't buy the insurance for this. We'll tell you what the price is. It's this. And it's, you know, make double what it costs to demo something just because of the price of increasing those liability limits.

But a good demolition contractor say, yes, we can raise these limits, but let us show you how we will minimize this risk so that we will not have a claim. That's the way demolition contractors think. So are you thinking like that while you're running your company? Are you thinking like that? That's the right question to ask.

And also, Wade, i've had customers over the years where just the government requires such pitifully low limits of coverage that they just don't, I hear what you're saying, Stephen, this is all that's required. I don't wanna buy any more insurance for that.

My argument to that is how do you protect your balance sheet? How do you protect your balance sheet from losing all this income? I had an automobile claim that maxed out the liability coverage [00:13:00] and maxed out the umbrella. When I say maxed out, paid the full policy limits on both of them.

The beautiful thing is the insurance carrier was not only representing themselves and closing out, this for whatever coverages they had in place, but they were protecting the contractor's assets. Because if I'm suing you for an auto accident and you've only got insurance of X amount and I know you got assets of X amount, or I think you do, I'm going after those too. A lot of times you'll see that at play. Does that make sense? 

Wade Carpenter: It's sort of synergistic relationship. If you take the lowest coverage versus trying to get, I mean if you have good data for your insurer, clean data, you get it in on time, you got a culture of safety, you got controls over your subs, things like that. You're consistently give them those that kind of stuff, it basically has a compounding effect on your growth. You can probably talk better than I can, but getting better [00:14:00] terms, fewer exclusions or stable bonding capacity. Talk about that a little bit. 

Stephen Brown: Absolutely. You have the right controls in place, you get better insurance pricing. And the question I get from a lot of contractors, how much will I save if you do that? I don't know. I'm gonna just tell you 10, 20%. I don't know if that's worth it. That's not the way to think about it.

The way to think about it is I'm gonna have controls in place on all my employees for safety. My drivers, I'm gonna have telematics in place. I'm gonna have good contracts that I signed transfer risk to others that I don't have to take. And I'm gonna be able to show the insurance underwriters what kind of projects I do, how long I've been in business, and the strength of my current insurance program.

So a lot of times you say doesn't it just depend on from an underwriter standpoint, how much premium they perceive they're gonna get from your risk? No. They know that if you're a contractor that's growing, the premium's gonna go up. [00:15:00] And they're gonna get adequate premium for the risk that they have, and that's the ideal customer they're looking for.

So they're gonna give you the most favorable rates. They're gonna give you the most lenient terms and conditions on your policies. Because remember, Wade an insurance carrier gives you a policy that they write and you have to accept it. It's called a unilateral contract. It's from them. So it's up to your agent to make sure they're negotiating everything that you need on there.

It's really not the job of your agent to do that for you. It's your job working with the agent. I say that. It sounds self-serving, but basically your agent is your coach to help you get you there where you wanna be. You don't have to know everything about insurance, but what you have to do is you have to listen carefully to what goes into your insurance pricing well before renewal, year round.

Understand the elements of the cost involved. You bid a job with certain workers' comp and general liability rates involved. Those change. How do [00:16:00] you plan for that going forward in a market where you just don't know what rates are gonna do? That's one element.

Then another element is to say, okay, it's not Stephen's job as my agent to worry about all this. It's my job to worry about this equally and as a partnership. When we come together and we're communicating with not only insurance underwriters, but bond underwriters, what we want and what our program and what our mission is, magical things happen. That's a fact.

Wade Carpenter: That leads perfectly what I wanted to say here. Because I think about it from the accounting standpoint and dealing with taxes. And if your approach to talking to your accountant is how do I avoid paying taxes? What can I do? And they're reactive to it as opposed to getting proactive with the CPA that understands construction and can plan for it.

It's the exact same thing because I see contractors, they get a contract first, and then they call Stephen at the [00:17:00] last minute. How do you get me this bond? It's like the contract first, insurance second. They're basically doing this in the reverse order that I would just say, they're buying it backwards.

If you contract first, insurance second, that means paying later. Right? 

Stephen Brown: That's right.

Wade Carpenter: I think too, instead of just avoiding insurance, leaning into it and understanding it better. 

Stephen Brown: You're exactly right. Just like your accountant, just like paying taxes. Do you think of that relationship as a necessary evil you have to deal with? Or is it something you embrace to help manage your risk?

Wade Carpenter: Yep. With that, was there any other closing thoughts on this one?

Stephen Brown: No, I think that's just it, Wade. It's you understanding that as your risks change, you need to change how you deal with those risks. What tools do you have to minimize those risks affecting your bottom line? How do you do that? You do that by being proactive. And insurance is a good way to [00:18:00] start.

It's not a necessary evil, but it's a process that can really help you control your profits, maintaining those profits. And isn't that the key? Because if you're maintaining your profits, and we preach this all the time, then you're keeping cash in your company. You're able to take care of your family.

You're able to launch into different areas that you're interested in doing in your construction work. However you look at it, those processes and how you do it, make your company more valuable, add less stress to you as you manage your company and help you manage controlled proper growth with less hidden dangers involved. 

Wade Carpenter: Thank you for bringing this to us, Stephen. For our listeners, I know you're glad to talk to anybody no matter where they are in the country about these things.

I think my takeaway from this is the best contractors don't avoid that risk. They just really design their business around it.

So with that said, we can put Stephen's contact information in the show notes or you can find it on the podcast [00:19:00] information.

We appreciate you joining us. If you would like, share, subscribe, it always helps to channel out. If you got any thoughts or comments about what we said today, we'd love to hear it. Put them below. And we will see you on the next show.