Gilbert Cost Control Consultants Corp.

I recently received a call from a friend of mine who told me about a small to mid-sized general contractor (under $35M in revenue per year) who just took a $200,000 hit on a project.

Apparently, the general contractor accepted a bid from a subcontractor whose bid was $200,000 less than the next lowest bidder. Guess what happened next?

You got it, the subcontractor walked away from the project once the job began. The general contactor ended up having to hire the next lowest bidder, at a $200,000 price increase, to complete the work.

So what happens next?

One or more of the following four scenarios are likely to occur:

1. The general contractor pushes on the remaining subcontractors to lower their costs. This can be done by cutting manpower costs (using lower cost and oftern lesser qualified tradespeople), swapping out the higher quality materials originally specified for lower quality ones, or asking the subs to reduce their already low profitability (good luck with this one!).

2. The general contractor can take a tip from the old Timex commercial and “take a licking and keep on ticking.” By dipping into his cash reserves, the contractor might be able to adhere to the originally agreed upon contract terms and keep the project moving forward. Unfortunately, most contractors have been feeling the squeeze from the recession for the past 12-18 months. Many have been relying on their reserves to keep the doors open and the cash might not be there to cover this type of loss. I talked with a contractor/developer the other day who is facing potential bankruptcy. He set aside $3,000,000 in reserves to see him through an economic downturn. Unfortunately that reserve only lasted 6 months and now many of his assets are being sold at public auction.

3. The general contractor might rely on his old friend “Mr. Change Order” to try to make up the loss. The problem is, he’ll need to aggressively pursue change order opportunities on not just this project but also on all other current and future projects. We recently saw this strategy in action when a struggling contractor delivered an unexpected $150,000 change order for winter weather conditions to his client. Now both the client and contractor are incurring legal costs trying to resolve the dispute.

4. The contractor could simply close the doors and walk away. For the owner, this is the worst possible scenario. Not only will another contractor need to be hired (at a premium) to finish the job, but the money that the owner already paid to the first general contractor may not have gone to pay the subs. When this happens, the owner may need to pay the subs again or face having liens put against his property. We saw this happen to a theater owner when his roofing subcontractor ran into financial problems. The theater owner paid the roofer who then paid the roofing material supplier. Unfortunately, the supplier applied the payment to an older invoice from another project that the roofer had worked on. When the roofer couldn’t come up with the cash to pay the balance of his outstanding account, the material supplier put a lien on the theater. The theater owner was unable to obtain his permanent financing until he paid the supplier (again) for the materials that were used on his project.

The moral of this story: when a general contractor or subcontractors bid seems too good to be true, it probably is.

Tags: BOMA, building, building owners and managers association, business failure, construction, construction equipment, construction management, design-build, facility management, facility manager, failing business, general contractor, IFMA, low bids, owner's representative, project management, risk management, TEC, Vistage, WALA, WASBO

This entry was posted on Friday, April 10th, 2009 at 7:48 pm and is filed under Blog. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.