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Why Do Contractors Fail?

Why Do Contractors Fail?. 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.

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Why Do Contractors Fail?

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  1. WhyDo Contractors Fail?

  2. Failure Rates: 2002-2012 Source: BizMiner

  3. Prequalification Financial Strength Character Experience Equipment Credit History Banking Relationships

  4. Contractor Failure Risks Low profit margins Onerous contracts Slow collections Unreasonable owners RISK Insufficient Capital High Materials prices Shortage of qualified, skilled workers

  5. Contractor Failure Risks Inadequate Management New Owner Change in Scope of Work Over Expansion RISK Sub Failure Materials Shortages Inclement Weather

  6. Reasons for Contractor Failure Accounting Problems Change in Leadership Material/ Equipment Shortages Scope of Business Labor Difficulties Unrealistic Growth Lack ofExperience Failure

  7. Accounting Issues • Inadequate cost tracking systems • Estimating or procurement problems • Underinsured • Improper accounting practices

  8. Management Issues • Leadership changes • No continuity plan when key person dies or becomes disabled

  9. Personnel Issues • Key staff leave company • Character issues

  10. Performance Issues • Unrealistic growth • Change in type or scope of work • Poor project selection • Onerous owners • Unsettled claims & change orders

  11. Shorter Lead Time Increase in Backlog Work Unrealistic Growth Unrealistic Growth

  12. Factors Beyond Control Economic Downturn Inflation Failure Weather Delays Site Conditions Labor Difficulties Materials Shortages

  13. Warning Signs That a Contractor Is in Trouble...

  14. Ineffective Financial Management System • Tight cash flow • Slow receivables • Past due bills • Vendors demanding cash

  15. Bank Lines of CreditConstantly Borrowed to Limit • All credit fully secured • Lines not renewed

  16. Poor Project Management • Inadequate supervision • Not getting best prices • Projects behind schedule • Claims • Litigation

  17. No ComprehensiveBusiness Plan • No contingency plans • No“road map” • No goals • No objectives

  18. Poor Estimating & Job Cost Reporting • Revenue & marginsdecrease • Continued operating losses • Loss of bonding capacity • Bid jobs too low

  19. Communication Problems • Disputes between contractor and owner • Poor communication from field to management

  20. Loss of Loyal Customers • Decreasing reputation for company’s ability to perform contracts on time & within budget

  21. Tips for Contractors to Avoid Default • Rights & responsibilities • Capabilities • Growth & overhead • Causes & warning signs • Communication Contractors

  22. Tips for Contractors to Avoid Default • Contract • Bond forms • Qualify surety • Qualify owner • Surety Relationship Contractors

  23. Tips for Contractors to Avoid Default • Construction-oriented CPA • Adjust overhead • Bank credit • Conserve capital • Bond subcontractors Contractors

  24. Claims Expectations Rights Obligations Resolution Completion

  25. Tips for Owners – Navigating a Claim • Understand bond • Cooperate • Comply with contract • Don’t overpay • Lien waivers • Timely default • Termination Owners

  26. 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).

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