A solid economy means companies are growing, governments have bigger budgets, bets are made on RE development, and a construction industry thrives.
Unfortunately like I have written before the construction industry is having a huge labor shortage. A labor shortage in an industry that is booming will naturally drive up prices of building, expanding, or renovating.
In the past this created a market of cheap contracts, where amateurs and small shops made promises they could not keep to contractors and owners. It appears that builders are starting to learn an age old idiom “You Get What You Pay For.”
This rant was inspired by Angie McElhaney CPA at MarksNelson for her excellent article in the KC Biz Journal.
Kansas City may once have been known as a cow town, but economic development is putting the city on the map. With projects totaling in the billions the boom is creating a big buzz and a ripple effect within the construction industry.
New projects mean more work for area contractors and more pressure. With money on the line, they can no longer afford to just award subcontracts to the lowest bidder. Pre-qualifying is essential not only to ensure subcontractors have the manpower and skills to complete their work, but to minimize the risk of default.
What to look for in a subcontractor
There isn’t a right or wrong way to prequalify subcontractors. You can handle it yourself, or engage a third party – such as a surety company. The information gathered depends on the size and complexity of the jobs.
Dig into the company’s history and practices. A good place to start is looking at the owner and management team. Keep an eye out for red flags such as a history of litigation, termination, bankruptcy or OSHA violations. Check on the company’s insurance coverages and Workers’ Comp Experience Modification Rating. Most importantly, request a list of previous jobs, including the nature and size of their projects and cross check them with their references from other customers, lenders, sureties and suppliers.
Consider visiting a subcontractor’s facilities and completed projects. By speaking with employees you’ll get a feel for whether its operations are well run, organized and safe. On-site visits will also help confirm the quality of work and whether the company has the equipment needed for the project.
Even if a subcontractor is competent with a quality management team, it’s risky to do business with a company whose workforce is spread too thin. Conduct your own employee audit. Examine the size and skills as well as a list of current and upcoming projects. Taking this approach will identify the volume of work the company can handle.
Managing your risk
Before awarding a contract, have a CPA with construction expertise look over the financial statements, including tax returns for each subcontractor. This will allow you to evaluate their financial health and verify the statements conform to Generally Accepted Accounting Principles (GAAP). Make sure the subcontractor has enough cash to keep its business going, the owners are maintaining sufficient equity in the company and that accounts receivable and payables are in line with the level of income.
If a subcontractor presents a high degree of risk consider imposing a contract value limit, requiring performance bonds or obtaining personal guarantees from the owners.
Bottom line, even with construction moving at a fast pace in Kansas City, it’s essential to take the time to prequalify potential hires. It could make the difference in finishing a project on time and on budget.
Source: KC Biz Journal
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