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Why Do Contractors Fail?

Why Do Contractors Fail?. Failure Rates. Source: US Census: 1989-2002 Business Information Tracking Series. 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%

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Why Do Contractors Fail?

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  1. WhyDo Contractors Fail?

  2. Failure Rates Source: US Census: 1989-2002 Business Information Tracking Series

  3. 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

  4. Failure Rates

  5. Surety Losses & Profitability

  6. Prequalification Financial Statements Capacity Organization References Credit History Banking Relationships

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

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

  9. Contractor Failure Accounting issues Management issues Personnel issues Performance issues Failure Unrealistic growth

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

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

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

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

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

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

  16. Warning Signs That a Contractor Is In Trouble...

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

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

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

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

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

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

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

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

  25. Tips for Contractors To Avoid Default • Contract • Bond forms • Qualify surety • Qualify owner • Surety Relationship Contractors

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

  27. Claims Expectations Rights Obligations Resolution Completion

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

  29. 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 | sio@sio.org

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