Understanding Contractor Failure: Key Risks and Avoidance Strategies (2002-2012)
This comprehensive analysis investigates the factors leading to contractor failures from 2002 to 2012, as sourced from BizMiner. It delves into critical issues such as financial strength, management practices, project selection, and external risks like economic downturns and materials shortages. Additionally, the text highlights warning signs of trouble, offering valuable tips for contractors to mitigate risks and maintain operational viability. Understanding these elements is crucial for both contractors and owners in navigating the complexities of construction projects.
Understanding Contractor Failure: Key Risks and Avoidance Strategies (2002-2012)
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Presentation Transcript
Failure Rates: 2002-2012 Source: BizMiner
Prequalification Financial Strength Character Experience Equipment Credit History Banking Relationships
Contractor Failure Risks Low profit margins Onerous contracts Slow collections Unreasonable owners RISK Insufficient Capital High Materials prices Shortage of qualified, skilled workers
Contractor Failure Risks Inadequate Management New Owner Change in Scope of Work Over Expansion RISK Sub Failure Materials Shortages Inclement Weather
Reasons for Contractor Failure Accounting Problems Change in Leadership Material/ Equipment Shortages Scope of Business Labor Difficulties Unrealistic Growth Lack ofExperience Failure
Accounting Issues • Inadequate cost tracking systems • Estimating or procurement problems • Underinsured • Improper accounting practices
Management Issues • Leadership changes • No continuity plan when key person dies or becomes disabled
Personnel Issues • Key staff leave company • Character issues
Performance Issues • Unrealistic growth • Change in type or scope of work • Poor project selection • Onerous owners • Unsettled claims & change orders
Shorter Lead Time Increase in Backlog Work Unrealistic Growth Unrealistic Growth
Factors Beyond Control Economic Downturn Inflation Failure Weather Delays Site Conditions Labor Difficulties Materials Shortages
Ineffective Financial Management System • Tight cash flow • Slow receivables • Past due bills • Vendors demanding cash
Bank Lines of CreditConstantly Borrowed to Limit • All credit fully secured • Lines not renewed
Poor Project Management • Inadequate supervision • Not getting best prices • Projects behind schedule • Claims • Litigation
No ComprehensiveBusiness Plan • No contingency plans • No“road map” • No goals • No objectives
Poor Estimating & Job Cost Reporting • Revenue & marginsdecrease • Continued operating losses • Loss of bonding capacity • Bid jobs too low
Communication Problems • Disputes between contractor and owner • Poor communication from field to management
Loss of Loyal Customers • Decreasing reputation for company’s ability to perform contracts on time & within budget
Tips for Contractors to Avoid Default • Rights & responsibilities • Capabilities • Growth & overhead • Causes & warning signs • Communication Contractors
Tips for Contractors to Avoid Default • Contract • Bond forms • Qualify surety • Qualify owner • Surety Relationship Contractors
Tips for Contractors to Avoid Default • Construction-oriented CPA • Adjust overhead • Bank credit • Conserve capital • Bond subcontractors Contractors
Claims Expectations Rights Obligations Resolution Completion
Tips for Owners – Navigating a Claim • Understand bond • Cooperate • Comply with contract • Don’t overpay • Lien waivers • Timely default • Termination Owners
For More Information Surety Information Office (SIO) www.sio.org | sio@sio.org SIO is a joint initiative of The Surety & Fidelity Association of America (SFAA) and National Association of Surety Bond Producers (NASBP).
