construction advisor summer 2008

Summer 08 - Eight Red Flags for Contractors

When Should You Say No?

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 — 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 —
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 — 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 — 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 — clear Work-in-Progress reports and billings, especially prebillings — 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.

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Construction Advisor is produced quarterly by Bober Markey Fedorovich's Construction Services
Team. For questions about the services we provide please contact our team leader, Dale A. Ruther, CPA, CIT, CDS at (330) 762-9785 or by email.

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