Can Your Project Really Afford Any Contractor Default?

The economy has finally bounced back from the trough caused by the subprime mortgage crisis, and construction dollars are being spent in increasing amounts as more structures are being built across core markets.

Our customers are pushing for even faster schedules. Time-to-market is critical. We are putting teams together based on proven track records, and they are performing well, given the limited skilled labor available in most markets.

According to Engineering News Record, contractors are three times as likely to fail in an economic recovery period than in a downturn. How can that be, and how can we avoid this through careful planning, talent management and leadership?

Several factors contribute to this high default rate during economic recovery periods, including:

  • Skilled Labor Shortages: After the downturn of 2008, many experienced construction tradesmen left the field—for good. According to the Bureau of Labor Statistics, skilled construction employment is down 19 percent from its 2007 peak, with the decline particularly stark in areas strongly affected by the housing bust. Now with construction roaring, many new, inexperienced workers have entered the job market, and – as with any new employees in any industry – need time to train and develop.

  • Talent Management: When contractors move into unfamiliar geographies or product types, they often engage in joint ventures with other firms that have either the local or product type knowledge. From a talent management standpoint, contractors need to balance winning new business with being able to accurately staff projects with the “right whos.”

  • Cash Flow: In a hot market, contractors are increasing their spending month over month as they take on more work – for labor, materials, equipment and subcontracts. In a contracting market, spending becomes less and less. Schedule pressure is also causing contractors to put more people on their jobs, increasing payrolls and putting a heavy strain on the contractors’ cash flow.

Even though challenges still exist in times of economic prosperity, what separates the good from the great general contractors is how they mitigate these known issues through careful planning, talent management and budgeting.

Conventional wisdom today says the bigger, more established contractors are “okay” and can’t fail. According to Monthly Labor Review, 20 percent of new construction firms fail in their first year of operation, and 70 percent have failed by the end of their seventh years. A Bizminer study of the 986,057 general contractors, operative builders, heavy construction contractors and special trade contractors operating in 2011 found that only 735,160 were still in business in 2013 – a 26.24 percent failure rate.

Image courtesy of Zurich

Today’s projects are moving fast and with the potential in an upturn to be 3X greater for contractor default, can you really afford to have even the smallest contractor on your job go down…let alone a big one?

History tells us now is the time to be vigilant with every project and endeavor, putting a consistent and objective process in place to create the right team to best serve the needs of your project. The process should take into account a number of factors, including past work history, safety records, default claim history and financial stability, to help reduce risk and ensure success.