why do contractors fail?

Failure Rates: 2002-2012

Source: BizMiner

Building, heavy/highway, and specialty trade contractors

In Business Survivors Failure Rate

853,372 (2002) 610,357 (2004) 28.5%

850,029 (2004) 649,602 (2006) 23.6%

1,155,245 (2006) 919,848(2008) 20.4%

897,602 (2009) 702,618 (2011) 21.7%

918,483 (2010) 696,441 (2012) 24.2%

Financial Strength Character Experience

Equipment Credit History

Banking Relationships

Prequalification

RISK

HighMaterials

prices

Unreasonableowners

Onerouscontracts

Shortage of qualified,skilled workers

Contractor Failure Risks

Insufficient Capital

Slow collections

Low profit margins

RISK

MaterialsShortages

OverExpansion

NewOwner

Inclement Weather

Contractor Failure Risks

SubFailure

Change inScope of

Work

Inadequate Management

Reasons for Contractor Failure

AccountingProblems Change in

Leadership

Scope of Business

Material/EquipmentShortages

UnrealisticGrowth

Failure

LaborDifficulties

Lack ofExperience

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

Unrealistic Growth

UnrealisticGrowth

Increase in Backlog Work

Shorter Lead Time

Factors Beyond Control

MaterialsShortages

SiteConditions

Inflation

LaborDifficulties

WeatherDelays

EconomicDownturn

Failure

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

ClaimsRights Obligations

Resolution

Completion

Expectations

• Understand bond• Cooperate• Comply with contract• Don’t overpay• Lien waivers• Timely default• Termination

Tips for Owners – Navigating a Claim

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).