why do contractors fail?. failure rates source: us census: 1989-2002 business information tracking...

Why

Do

Contractors

Fail?

Why

Do

Contractors

Fail?

Failure Rates

Failure Rate Comparison - All Company Sizes-18.00

-17.00

-16.00

-15.00

-14.00

-13.00

-12.00

-11.00

-10.00

-9.00

-8.00

1989-1990

1991-1992

1993-1994

1995-1996

1997-1998

1999-2000

2001-2002

Total: All Industries

Construction

Source: US Census: 1989-2002 Business Information Tracking Series

Failure Rates 2002 - 2006

Source: BizMiner

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%

Failure Rates

Surety Losses & Profitability

Contract Surety Industry Loss RatiosCY 1958 - 2006

Source: The Surety & Fidelity Association of America

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

110.0%

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Calendar Year

LossRatio

Average Contract Surety Loss Ratio for 1958 - 2006 = 40.4%

Prequalification

Financial Statements

Capacity Organization

ReferencesCredit History

Banking Relationships

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

Contractor Failure

Accountingissues Management

issues

Personnelissues

Performanceissues

Unrealisticgrowth

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

UnrealisticGrowth

Increase in Backlog Work

Shorter Lead Time

Factors Beyond Control

MaterialsShortages

SiteConditions

Inflation

LaborDifficulties

WeatherDelays

EconomicDownturn

Failure

Warning Signs That a

Contractor Is In Trouble...

Warning Signs That a

Contractor Is In Trouble...

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

Claims

Rights 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 Office1828 L St. NW, Suite 720

Washington, DC 20036

202-686-7463 | Fax 202-686-3656

www.sio.org | sio@sio.org