Why Do Contractors Fail?

Failure Rates Source: US Census: Business Information Tracking Series

Failure Rates Source: BizMiner Failure Rates 2002 – Trade Contractors29.0% 24.4% Heavy Highway27.4% 21.6% Nonresidential Bldgs25.0% 17.5% Industrial24.6% 14.6%

Failure Rates

Surety Losses & Profitability

Prequalification Financial Statements CapacityOrganization References Credit History Banking Relationships

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

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

Contractor Failure Accounting issues Management issues Personnel issues Performance issues Unrealistic growth 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 Unrealistic Growth Increase in Backlog Work Shorter Lead Time

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

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 Credit Constantly 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 Comprehensive Business Plan No contingency plans No “road map” No goals No objectives

Poor Estimating & Job Cost Reporting Revenue & margins decrease 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 RightsObligations 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 is a joint initiative of The National Association of Surety Bond Producers (NASBP) and Surety & Fidelity Association of America (SFAA).