why do contractors fail?. failure rates source: us census: 1989-2002 business information tracking...
TRANSCRIPT
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 | [email protected]