At BuildingConnected, we work with nearly 1,200 General Contractors across the United States and Canada, ranging from massive builders like Turner Construction to local regional general contractors. The small- and medium-sized GCs are my favorite. Typically, these are family-run organizations that have spent years growing their books of business. Their founders are entrepreneurs who have taken a leap of faith to start their own businesses while stimulating our economy and creating more opportunities for the people around them. I admire all of them for their courage and perseverance. Building a company is not easy, regardless of what anyone thinks. Once you have overcome the challenge of building a successful business, it becomes crucially important to protect your asset from disastrous events.
Bad Things do Happen
In construction, catastrophic events do occur. Luckily, many of these events are foreseeable and preventable through due diligence and qualifying subcontractors. Unfortunately, not all general contractors take preventative measures to protect themselves from such catastrophes. I’m amazed at how many general contractors don’t take qualifying subcontractors seriously. I can’t tell you how many times I’ve heard this quote:
“We don’t pre-qualify because we only work with people we know and have been around a long time.”
I’m sorry, but this makes absolutely no sense. Great long-standing companies go bust all the time. As a general contractor, subcontractors are your biggest asset and your biggest risk. In good times and bad, subcontractors go out of business and default on projects. This creates a huge liability for general contractors. Understanding your subcontractors’ financial health is the easiest way to prevent this from happening on your projects.
Why Companies Fail?
The #1 reason that subcontractors fail is cashflow. It’s not that they have a bad business. Often, they have a lot of backlogged work. So what happens? Here is a perfect example of how a subcontractor can become overextended and go out of business. It can happen fast and it can happen to anyone (even people you know).
A subcontractor takes several large projects as they look to expand and grow their business. These projects represent a substantial portion of their overall portfolio and require the subcontractor to tie up a lot of working capital. If everything goes right, they will see increased profits and be able to properly take on larger projects in the future.
Unfortunately, the subcontractor floats much of the project’s costs. They are only paid for work-in-place and, often, 90+ days later. Yet, vendors/suppliers still require Net-30 payment terms and employees are typically paid every 2 weeks. Both can eat up working capital quickly. If these projects are delayed, the subcontractor can experience negative cash flow. Their expenses will exceed their revenues and, if they don’t have enough working capital, they will simply cease to exist. It’s a terrible thing to see happen, but it’s the reality of this industry.
As a general contractor, this is one of the worst things that can happen. There’s a potential daisy chain of events that could cost you money, time and impact your reputation. Other consequences include lost time, cost of hiring a replacement contractor, the cost of change orders from your other Subcontractors that are now delayed, and dealing with unhappy owners Any combination of these things can be devastating, even for the largest general contractors.
This best way to prevent this from happening on your projects is to prequalify subcontractors. Unfortunately, prequalifying vendors has historically been extremely time-consuming and difficult. So at BuildingConnected, we used all of our software design talent toward finding a way to make it as easy as possible. Our new solution is fundamentally different than anything you’ve ever seen before. It will allow any sized business to effectively collect and evaluate subcontractor qualifications.
Dustin DeVan – CEO, Co-Founder