The Generals - Fall/Winter 2013 - (Page 14)

FEATURE Mitigating the of Subcontractor and Supplier Default RISK By Jonathan Halloran, EVP Client Services, Textura A s the construction economy recovers from the downturn, optimism has begun to spring up among building contractors in Ontario and around the country. Statistics Canada’s bulletin, Architectural Services (Catalogue no. 63-245X), credited 90.5 per cent of the total $3.5 billion in revenue to building architectural services, with the remaining 9.5 per cent credited to landscape architectural companies. Developers, while still cautious, are breaking ground on long delayed projects and landmark projects, such as the Pan Am Games stadium, have begun. A sense of optimism is in the air. However, history has taught us that recovery periods are the riskiest time for default among all of the boom and bust phases of the construction economic cycle. Data from the Surety Association of Canada suggests that during 2010 and 2011, the national loss ratio was at 30 per cent. Even though 2012 and 2013 so far have been more positive, everyone must be cautious about default risk. 14 Factors Driving Increased Default Risk It might seem counterintuitive, but the highest default risk occurs during economic recoveries not during downturns. During the recent turmoil, many contractors had large, high margined backlogs carrying over from prior boom period. As contractors took on new work with lower margins, their strong cash positions began to wane, which lead to a decrease in the number of defaults. During the current economic recovery bid prices have stabilized, but it is largely a “marginless recovery,” in which profits are not strong enough to help companies return to healthy balance sheets. Contractors had to use up cash reserves to stay afloat during the downturn and the high margined backlog has dried up. The current low margin work means diminished cash flow and reserves, leading to a much higher risk of defaults. Strong contractors are now stable; weak contractors may have to resort to bankruptcy. It is more important than ever to View this issue online at safeguard projects and owners against default risk. In this article we will review five approaches to mitigate default risk: • Qualification • Bid leveling, de-scoping, awarding, and contracting • Performance security • Managing payments and cash flow • Risk management plans. Building a Successful Qualification Program A relatively new practice in the construction industry, subcontractor qualification programs come in many different shapes and sizes. Large companies run sophisticated programs, while other builders still rely on a more traditional qualification program, namely acquiring a performance and payment bond on all subcontractors. Some may have no qualification program at all. The first factor to consider is that a qualification program that is workable and used is

Table of Contents for the Digital Edition of The Generals - Fall/Winter 2013

Chairman’s Message
President’s Message
Incoming Chairman’s Message
Upcoming Events - In Memoriam
Mitigating the Risk of Subcontractor and Supplier Default
Glen Murray Has Cause to Pause
Healthy Competition: Staying Onside the Competition Act through the OGCA’s New Compliance Program
Insurers and Contractors: Working Together to Support Investment in Critical Infrastructure
Thank You to Our 8th Construction Symposium Sponsors
Prompt Payment Legislation and the General Contractor
75th Annual General Meeting & Conference
Index to Advertisers

The Generals - Fall/Winter 2013