Why Do Contractors Fail

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WhyDo Contractors Fail?
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Failure Rates
Source US Census 1989-2002 Business Information
Tracking Series
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Failure Rates 2002 - 2006

• Failure Rates 2002 2004 2004 - 2006
• Trade Contractors 29.0 24.4
• Heavy Highway 27.4 21.6
• Nonresidential Bldgs 25.0 17.5
• Industrial 24.6 14.6

Source BizMiner
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Failure Rates
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Surety Losses Profitability
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Prequalification
Financial Statements
Capacity
Organization
References
Credit History
Banking Relationships
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Contractor Failure Risks
Onerous contracts
Low profit margins
Unreasonable owners
Slow collections
RISK
High Materials prices
Insufficient Capital
Shortage of qualified, skilled workers
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Contractor Failure Risks
New Owner
Inadequate Management
Over Expansion
Change in Scope of Work
RISK
Materials Shortages
Sub Failure
Inclement Weather
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Contractor Failure
Accounting issues
Management issues
Personnel issues
Performance issues
Failure
Unrealistic growth
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Accounting Issues

• Inadequate cost tracking systems
• Estimating or procurement problems
• Underinsured
• Improper accounting practices

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Management Issues

• Leadership changes
• No continuity plan when key person dies or
  becomes disabled
• Changes in scope of business

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Personnel Issues

• Key staff leave company
• Character issues

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Performance Issues

• Unrealistic growth
• Change in type or scope of work
• Poor project selection
• Onerous owners
• Unsettled claims change orders

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Unrealistic Growth
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Factors Beyond Control
Economic Downturn
Inflation
Failure
Weather Delays
Site Conditions
Materials Shortages
Labor Difficulties
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Warning Signs That a Contractor Is In Trouble...
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Ineffective Financial Management System

• Tight cash flow
• Slow receivables
• Past due bills
• Vendors demanding cash

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Bank Lines of CreditConstantly Borrowed to Limit

• All credit fully secured
• Lines not renewed

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Poor Project Management

• Inadequate supervision
• Not getting best prices
• Projects behind schedule
• Claims
• Litigation

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No ComprehensiveBusiness Plan

• No contingency plans
• No road map
• No goals
• No objectives

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Poor Estimating Job Cost Reporting

• Revenue marginsdecrease
• Continued operating losses
• Loss of bonding capacity
• Bid jobs too low

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Communication Problems

• Disputes between contractor and owner
• Poor communication from field to management

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Loss of Loyal Customers

• Decreasing reputation for companys ability to
  perform contracts on time within budget

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Tips for Contractors To Avoid Default

• Rights responsibilities
• Capabilities
• Growth overhead
• Causes warning signs
• Communication

Contractors
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Tips for Contractors To Avoid Default

• Contract
• Bond forms
• Qualify surety
• Qualify owner
• Surety Relationship

Contractors
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Tips for Contractors To Avoid Default

• Construction-oriented CPA
• Adjust overhead
• Bank credit
• Conserve capital
• Bond subcontractors

Contractors
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Claims
Rights
Obligations
Expectations
Resolution
Completion
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Tips for Owners Navigating a Claim

• Understand bond
• Cooperate
• Comply with contract
• Dont overpay
• Lien waivers
• Timely default
• Termination

Owners
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For More Information

• Surety Information Office
• 1828 L St. NW, Suite 720
• Washington, DC 20036
• 202-686-7463 Fax [phone]
• www.sio.org sio_at_sio.org