Transcript Why Do Contractors Fail?

Why
Do
Contractors
Fail?
Failure Rates
Failure Rate Comparison - All Company Sizes
-18.00
-17.00
Total: All Industries
-16.00
Construction
-15.00
-14.00
-13.00
-12.00
-11.00
-10.00
-9.00
-8.00
19891990
19911992
19931994
19951996
19971998
Source: US Census: 1989-2002 Business Information Tracking Series
19992000
20012002
Failure Rates 2002 - 2006
Failure Rates
2002 – 2004
Trade Contractors
29.0%
Heavy Highway
27.4%
Nonresidential Bldgs 25.0%
Industrial
24.6%
Source: BizMiner
2004 - 2006
24.4%
21.6%
17.5%
14.6%
Failure Rates
Surety Losses & Profitability
Contract Surety Industry Loss Ratios
CY 1958 - 2006
Source: The Surety & Fidelity Association of America
110.0%
Average Contract Surety Loss Ratio for 1958 - 2006 = 40.4%
100.0%
90.0%
80.0%
70.0%
Loss
60.0%
Ratio
50.0%
40.0%
30.0%
20.0%
10.0%
58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20
Calendar Year
Prequalification
Financial
Statements
Capacity
References
Organization
Credit
History
Banking
Relationships
Contractor Failure Risks
Low profit
margins
Slow
collections
Onerous
contracts
RISK
Unreasonable
owners
High
Materials
prices
Insufficient
Capital
Shortage of qualified,
skilled workers
Contractor Failure Risks
Inadequate
Management
Change in
Scope of
Work
New
Owner
RISK
Sub
Failure
Over
Expansion
Materials
Shortages
Inclement
Weather
Contractor Failure
Accounting
issues
Personnel
issues
Management
issues
Performance
issues
Unrealistic
growth
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
• Changes in scope of
business
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
Unrealistic Growth
Increase in
Backlog Work
Shorter
Lead Time
Unrealistic
Growth
Factors Beyond Control
Economic
Downturn
Weather
Delays
Labor
Difficulties
Inflation
Failure
Site
Conditions
Materials
Shortages
Warning Signs That a
Contractor Is In
Trouble...
Ineffective Financial
Management System
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•
Tight cash flow
Slow receivables
Past due bills
Vendors demanding cash
Bank Lines of Credit
Constantly Borrowed to Limit
• All credit fully
secured
• Lines not renewed
Poor Project Management
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•
•
•
•
Inadequate supervision
Not getting best prices
Projects behind schedule
Claims
Litigation
No Comprehensive
Business Plan
• No contingency
plans
• No “road map”
• No goals
• No objectives
Poor Estimating & Job
Cost Reporting
• Revenue & margins
decrease
• 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
Contractors
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Rights & responsibilities
Capabilities
Growth & overhead
Causes & warning signs
Communication
Tips for Contractors
To Avoid Default
Contractors
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•
•
•
•
Contract
Bond forms
Qualify surety
Qualify owner
Surety Relationship
Tips for Contractors
To Avoid Default
Contractors
• Construction-oriented
CPA
• Adjust overhead
• Bank credit
• Conserve capital
• Bond subcontractors
Claims
Expectations
Rights
Resolution
Completion
Obligations
Tips for Owners –
Navigating a Claim
Owners
• Understand bond
• Cooperate
• Comply with contract
• Don’t overpay
• Lien waivers
• Timely default
• Termination
For More Information
Surety Information Office
1828 L St. NW, Suite 720
Washington, DC 20036
202-686-7463 | Fax 202-686-3656
www.sio.org | [email protected]