Why do contractors fail? That’s a question we hear a lot about the construction industry. Our previous blog article called ‘What is a Contract Surety Bond’ gave a brief overview of what is a surety bond, what surety bonds actually do and how to qualify for a surety bond. But this article will go over some of the many reasons why contractors fail. But it’s not just the smaller contractors, regardless of their size, some contractors fail.
There are several reasons why contractors and subcontractors fail, including managerial, financial, labour and materials, and of course, contractors fail even due to uncontrollable factors.
Contractors Fail Because of Managerial problems:
- Unrealistic growth – thinking new/different markets would be easy to break into when they are not
- Inadequate project supervision
- Quantity over quality – biting off too much and losing sight of quality work
- Poor project selections – ambitious projects that stretch comfort levels often lead to issues
- Inadequate accounting, financial, or project management systems – relying too heavily on prior principals that worked ‘back in the day’ and not having a realistic view of the company
- Management or personnel changes
- No contingency plans, goals, or objectives
- Disputes between the contractor and project owner
- Poor communication between management and field workers
Contractors Fail Because of Financial Problems:
- Insufficient capital or profits – not having enough money to pay suppliers or employees
- Receivables turning over slower than usual
- Poor financial management – undervaluing projects and not realizing cost overruns
- Banking and surety changes
- Vendors demanding cash on delivery (COD) for supplies and materials
- Lead contractor on a different job does not pay
Labour, Equipment, and Material Problems
- Shortage of labour and materials – not being able to find the right materials or the employees to do the work
- Safety violations on the job site
Uncontrollable Factors
- Industry or economic weakness
- Severe weather
- Pandemics
- One or more projects has a claim
- Owner court battles
How Contractors Can Avoid Default
- Manage your growth
- Control your overhead
- Communicate with the surety if and when problems arise
- Understand contracts and their language
- Read bond forms and look for difficult or unmanageable terms and conditions
- Verify the surety’s licensing abilities by checking with the provincial insurance department
- Develop a solid relationship with the surety and remain respectful of their decisions and practices
- Have a bank line of credit available to support your business plans
- Conserve your capital
- Adjust your overhead
*Please note, this article is not intended to be advice. For the advice you need, and for more information on Contract Surety bonds, license bonds, permit bonds, carnet bonds, excise bonds and more, head over to getbonded.ca
Click here to read part one of this surety blog series titled ‘What are Contract Surety Bonds?’
