why do contractors fail?
Post on 16-Mar-2016
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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).
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