Bonding companies see increasing number of contractor and subcontractor failures
It should come as no surprise that the sluggish economy is wreaking havoc on the construction industry. For the past year, contractors and subcontractors have been bidding projects at, or often below cost, just to keep the cash flowing. These companies were hoping that the market would have turned by now resulting in a rise in new construction and remodeling that would replenish their dwindling bank accounts. Unfortunately, that hoped for uptick is still on the far horizon in most regions.
So what’s a prudent owner facing a construction project to do? Take some advice from other owners who are currently building:
- Be very careful in the selection of your team and your construction delivery process. I spoke earlier this week with the owner of a large food processing facility that is looking to add 100,000 square feet to their building. He said that while he had an outstanding relationship with a small local builder, he decided to select a much larger general contractor to perform the work because the risk of them failing was likely to be less. He said they were using the same strategy when selecting their large subcontractors–particularly the mechanical subs.
- Consider requiring bonds. While I am not an advocate for bonding every project, it can be a good risk management strategy during times of economic uncertainty. While many owners are requiring their general contractors to obtain a bond, more risk averse firms are asking for individual subs to obtain their own bonds. While the ability to bond is not a guarantee that the contractor or subcontractor will remain in business through the duration of the project, bond companies can often do a better job of analyzing the financial strength of contractors than you are able to do on your own. Manyconstruction industry experts predict the failure of at least one subcontractor over the duration of each year-long project, making the additional cost for a bond, money well spent.
- Use a title company to pay the subcontractors (and suppliers) directly. While many contractors will balk at this strategy, preferring to have the funds pass through their own bank account, this can help to mitigate your risk substantially. While it may cost a bit more to have the title company cut the checks and verify the payments, it is a great strategy to reduce the risk of potential liens.
For more strategies to manage the risk on your next building project, drop me an e-mail at gilbertcostcontrol@gmail.com or give me a call at 608-516-2414.
Tags: ADA, architecture, board of directors, BOMA, bonding, building owners and managers association, construction equipment, construction law, construction management, Dane County Dental Association, design, design-build, facility management, facility manager, fiduciary responsibility, general contractor, IFMA, low bids, owner's representative, project management, risk management, Vistage, WALA, WASBO
