CONSTRUCTION Accounting ARTICLE - Contractor Heeds Warning Signs of Questionable Owner

Target Audience: Construction Industry Professionals, General Contractors, Construction Accountants

A general contractor in a turbulent suburban housing market was torn. He knew he could put together a stellar bid for a new condominium project, but the finances of the owner involved were highly questionable. This local property developer had been involved in some unflattering legal proceedings of late and its financial standing was uncertain to say the least. The contractor paid a visit to his financial advisor to discuss the matter.

Stay on high alert

The advisor agreed that information such as this should keep the contractor on high alert should he decide to go through with the bid and, if successful, the project. In fact, some detailed research into the developer’s financial history/standing and lending situation were undoubtedly in order.

Another step to take if the project does go through, the advisor noted, was to immediately open the lines of communication with any lenders involved. Should a lender’s presence on the project suddenly increase while the owner’s involvement (and communication) abruptly decrease, it could mean the job is headed south.

If owner bankruptcy becomes likely, the advisor warned, the contractor will need to be prepared to properly file a mechanics’ lien as soon as possible as well as enter negotiations with the owner and his or her (or its) creditors.

Communicate and document

The advisor then turned to more nuts-and-bolts financial matters. When owners request out-of-scope work, fail to fulfill commitments and are unresponsive to contractor inquiries, project budgets can skyrocket.

The advisor cautioned that, if the contractor starts noticing the aforementioned behavior, he should be especially diligent about documenting work, notifying owners on paper before cost overruns occur and detailing exactly why a change order is necessary. Of course, the advisor observed, some wrong turns on the project may be the direct responsibility of his workers. So he should have a comprehensive system in place to alert him when productivity and resource allocation are suffering.

For example, software programs can help chart variables such as labor costs, materials costs, percent of job completed and equipment rental scheduling, and then compare the actual numbers to the planned schedule and budget. When the actual costs and times start to creep further from the original budget and timeline, the advisor counseled, it’s time to take corrective action.

Get a boost

The contractor in this case followed his advisor’s suggestions and carefully vetted the dubious developer. The increased diligence was time-consuming and challenging but, ultimately, he boosted his profit margin on the job thanks to several well-documented change orders. How’s that for a happy ending?

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