Recognizing Managing a Distressed Subcontractor Risk Con 2019

Recognizing & Managing a Distressed Subcontractor Risk. Con 2019

Introduction to Good Practices < Section 1 Warning Signs & Management Prior to Start < Section 2 Warning Signs & Management During Performance < Section 3 Once Default Occurs < Section 4 Contents Risk. Con 2019

Section 1 Introduction to Good Practices Risk. Con 2019

Introduction to Good Practices Confirm license } Get a signed subcontract } Verify insurance } Verify bonds } Risk. Con 2019

Good Practices – License Are there any specialty licenses required for their work? } When is the license required? } License verification is best practice } Risk. Con 2019

Good Practices – Subcontract } Subcontract should address: • • • Risk. Con 2019 Scope of work Price and payment terms Time of completion Changes in the work Warranties Indemnity Insurance Notice of claims Termination Flow-down provisions Documentation Bond requirement or SDI

Good Practices – Subcontract } Minimum insurance requirements: • • • General liability Worker’s compensation/employer’s liability Auto liability Professional/pollution liability (based on scope) Coverage conditions: • Primary and non-contributory • Waiver of subrogation • Notice of cancellation • General contractor, subcontractor, and other parties as required by contract should be listed as additional insureds Risk. Con 2019

Good Practices – Bonds Acceptable surety } Bond is executed properly: } • Subcontractor name, dollar amount, project name and address agrees to the subcontract • Surety agent signature and subcontractor signature in place, subcontractor signature must be an officer of the company • Power of attorney verification, including notary • Agent’s name on the bond should match that of the power of attorney attached to the bond } Suggest bond verification letter when bond is of significant value Risk. Con 2019

Section 2 Prior to Start: Warning Signs and Management Strategies Risk. Con 2019

Why do Subcontractors Fail? Risk. Con 2019

Why do Subcontractors Fail? Cash flow } Personnel issues (changes in ownership or management) } Performance issues } Management issues (changes in business strategy or focus) } Unrealistic or poorly managed growth } Uncontrollable conditions (failure of payment on another project, severe weather, unexpected economic downturn, material shortage, etc. ) } Risk. Con 2019

Warning Signs – Prior to Start Unusually low bid price compared to competition (15% or more) } Size of project is substantially larger than past projects } Never worked in location or market sector before } Questionable reputation, weak financials, and poor payment history } Excessive or unusual clarifications in proposal } Bad references } Current backlog } Risk. Con 2019

Warning Signs – Prior to Start Proposed material substitutions } New products } Surety using “Funds Control” or “Escrow” } Request to split contract to stay within bonding capacity } New bank and/or surety } Open performance or payment bond claims or other litigation } Delay in getting a bond/not able to get a bond } Risk. Con 2019

Warning Signs – Prior to Start Reluctance to sign or late return of subcontract } Reluctance or delay in providing financial information or payment and performance bonds } Estimator gets fired or quits } Company gets bought out or has new management } Risk. Con 2019

Management Strategies – Prior to Start } Good Practices • • • Visit office location and/or operations Interviews (meet the project manager and superintendent, etc. ) Scope review meetings Understand their capabilities Check past work history Call other contractors to ask about their experiences Consider the next bidder – think long term best interest for the project } Plan for resources; assess the labor market } Financials are a good resource } Risk. Con 2019

Management Strategies – Prior to Start Do not get trapped where you have no choice but to use a bad subcontractor } If you use the subcontractor, get in their business } • Get contract documents approved early • Bonds should take 1 – 2 weeks to be delivered • Set up joint checks, direct payment, higher retainage, or labor only agreements • Detailed schedule of values structure • Get to know the vendors and lower-tier contractors • Plan to manage like it’s a self-performed package Risk. Con 2019

Section 3 During Performance: Warning Signs and Management Strategies Risk. Con 2019

Warning Signs – During Performance Risk. Con 2019

Warning Signs – During Performance Lack of engagement with start-up, schedule, and superintendent } Submittal or mock-up problems } Change of or lack of supervision } Lack of or inconsistent manpower, production falls off, schedule slippage } Labor walking off the job or not showing up the next day } Poor communication (late returning calls and emails, missing meetings, etc. ) } Daily reports – lack of them or aggressive reporting on delays, changes, etc. } Risk. Con 2019

Warning Signs – During Performance Inability to procure materials, submit shop drawings or RFIs timely } Excessive CORs } Subcontractor requests early payment or early reduction in retainage } Notices of non-payment from lower-tier subcontractors or suppliers – or just rumors of non -payment to labor and suppliers } Subcontractor does not want surety consent on COs } Surety requests status frequently } Risk. Con 2019

Management Strategies – During Performance } Review expectations established in start-up meeting } Do not overpay } Periodic inspection of facilities and stored materials } Monitor daily reports } Regular meetings with subcontractor’s principals and project team } Talk to the subcontractor’s labor to get their perspective on how the operations are going Risk. Con 2019

Mitigation – Documentation } Most project communication is discoverable (including email and text messages) } Maintain professionalism } Don’t rush to respond; reflect on difficult or emotional messages } Do not forward communications from Legal Department } Records retention and litigation holds Risk. Con 2019

Section 4 Once Default Occurs Risk. Con 2019

Once Default Occurs “I have tried everything and the subcontractor is not getting it done. ” Risk. Con 2019

Non-performance, Default, and Termination Get legal counsel involved if necessary } Notice of Non-performance } Reduce scope, supplement, withhold payment, etc. } Notice of Default with defined period to cure } Notice of Termination } Notify surety if bonded } Create follow up correspondence to report expected and actual costs } Track costs separately } Evaluate obligation to notify owner and/or lender } Risk. Con 2019

Non-performance, Default, and Termination Document the current status of the work and the completion of the work (pictures/daily reports). This becomes the primary evidence in claims. } Consider “price to finish” from other subcontractors for file. } Risk. Con 2019

Let’s End on a Good Note } The subcontract is an AGREEMENT. No one was forced into the relationship. If the Project Manager, Superintendent, and Subcontractor are not entering into the agreement with smiles, you might need to rethink your choice. Risk. Con 2019

Everybody needs a T-shirt Risk. Con 2019

Thank you Questions & Answers Risk. Con 2019