| Summer 2008 |
Construction Advisor
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When Should You Say No? Eight Red Flags for Contractors
When nightmare jobs are examined to determine what went wrong, a few factors come up over and over again. All of them are worth careful consideration before taking on work, especially in today’s uncertain economic climate.
Here are eight red flags that signal danger &mdash and possibly a job to avoid.
1. Questionable finances — Due diligence is always important, but even more so in a softening economy. Subcontractors should confirm the GC’s financial capacities, and both should verify the owner’s status. They should look at credit, too, because there are two kinds: a loan in place, and a loan somebody is hoping for.
Most basic facts about a company’s standing can be discovered with a bit of research starting with banks, industry associations and public information Web sites.
2. Unfamiliar work — Two GC partners were asked to bid on a racquetball complex. Much of the job would be routine, they had a great set of subs, the margins were impressive and the client was strong and stable.
But the partners had never contracted this type of flooring before and could imagine it buckling. After talking it through with associates and advisers, they offered to help the owner and review the job &mdash and then recommended another GC better suited to the project.
3. Unfamiliar terrain — Some problems that are manageable on home territory loom larger far away. Contractors often find supplies hard to line up, different regulations in force or labor in short supply.
When an apartment market boomed, the owners of a roofing company two states over wanted a piece of it. They got it &mdash and found a labor market dry as a bone. What were their choices? They could scare up labor, pay travel expenses for their own local crews, or produce no workers and be sued for breach of contract. As it turned out, they had to do a little of each.
4. Too many demands — Does an owner harbor unrealistic expectations about budgets, performance goals or schedules? Does he want to move forward anyway? Possibly the most dangerous words in construction are
"We’ll work it out as we go."
Does the client insist on hiring friends or relatives for certain jobs, rather than letting a GC organize its own reliable subs? When the client’s brother-in-law supplies and installs windows that leak, you can be sure the GC will get a share of the problem.
Difficult clients come in many varieties, but good clients are all alike in one way: They respect the conventions of business, and don’t mind agreeing to them.
5. Uncertain relationships — If you’re not comfortable with the client or the GC, figure out why. Discomfort might stem from something undefined, like bad chemistry. Is that likely to improve over the course of the job, or get worse? Feelings may be vague, but they might be a warning about your lack of confidence in the team.
6. Questions about supplier reliability — General contractors should be diligent about their subs as well. There’s no substitute for relationships &mdash the GC who has worked with three concrete companies for years, and bids them against each other, is in the strongest position.
But every GC must bring on new subcontractors now and then, and when that happens the GC should proceed by a routine that turns up outstanding liens, OSHA problems, a bad show-up reputation or other problems.
7. Big big job — Big big Loader is a famous brand in toys. Some contractors want to be big big contractors, fast. A paver’s first Big Job brought slower paydays and ballooning overhead. It had figured costs for labor and material and a few other details, but had underestimated equipment rental and travel. The paver also had to hire an estimator if it hoped to get the next Big Job.
By the time cash finally came in, it was starting the second job, barely making payrolls. It was entering the second quarter behind and besieged.
8. Becoming a bank — In addition to his cash problems, the contractor in the previous example was floating his client a large, interest-free loan.
That can also happen when one contractor takes over from another. Without a full understanding of the job’s status &mdash clear WIP reports and billings, especially prebillings &mdash the new contractor might be entering a long period without money coming in. Plenty will go out, however, and that’s more or less a free loan to the client.
Don’t Ignore Red Flags
Every problem isn’t a signal to decline, of course, but the presence of any of these should be cause for close analysis before you commit to a contract.
Construction Advisor is produced quarterly by Bober, Markey, Fedorovich & Company's Construction Services Team.
For questions or to obtain additional information about the services we provide to construction companies and contractors, please call or email our team leader, Dale A. Ruther, CPA, CIT at (330) 762-9785 or
dale@bobermarkey.com.
Unless expressly stated otherwise, any U.S. tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
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