by Mark Paronich
When inviting general contractors to bid, most owners will check references, evaluate performance on similar projects, and put GC’s through at least a rudimentary financial prequalification process. But in terms of risk management, that may not be enough protection from a variety of threats that could derail the project.
Here’s some insight on how to take a deeper dive into the financial practices and operating procedures of general contractors. These are four questions all owners should ask a prospective GC to help avoid unseen risks and ensure a successful outcome.
What is their equity and liquidity?
Financially responsible general contractors should maintain a healthy amount of cash on hand rather than draw down excessively through payroll, bonuses, or unwarranted capital expenditures. In my opinion a line of credit is not an acceptable substitute for cash on hand. For example, Delphi has a line of credit in the millions that has never been drawn against.
How do they vet their subcontractors?
Conventional wisdom would suggest that subcontractor issues are a headache solely for the general contractor. But that does not mean that the owner (or the project) is insulated from harm as a result of a financially risky subcontractor. All it takes is one lien filed by one unpaid sub of a sub to potentially jeopardize a project’s financing or final conveyance.
It is absolutely essential for a general contractor to fully vet all subcontractors not only in terms of their reputation for quality and their safety history but also their financial health. This can be a cumbersome and time-consuming process that not all general contractors have the resources or diligence to undertake.
Delphi rigorously vets our subs from top to bottom and insists on examining financial statements as part of that process. We work only with qualified subs that we are certain have the financial wherewithal to pay their suppliers and their second-tier subs. We also diligently track which third-tier subs subcontractors are actually using on a project, so we minimize the risk of liens from them to the owner.
What are the details of their bonding and insurance programs?
Many general contractors will publish their overall bonding capacity, but it’s also important to know their per project bonding and who the issuer is. For reputable surety brokers and bonding carriers, there is a direct relationship between working capital and allowable bonding capacity. Be sure that your selected general contractor has plenty of capacity to spare among their active projects and that they are backed by a leading agency.
Similarly with insurance, be sure to determine who the insurer is, the extent of the coverage, and how much excess coverage the GC is carrying. Also inquire about the contractor’s EMR rating. This will not only give you an idea of their safety performance but also indicate the relative cost of insurance being paid against a benchmark of 1.0. (The lower the EMR, the better the insurance savings which can be passed on to the client.)
Where is their financial accountability?
In my opinion, any larger general contractor should consider it a fiduciary duty to ensure the completion of rigorous annual audits. As CFO of a company of Delphi’s size and revenue, I bring in a top-tier national accounting firm to conduct full audits annually. This ensures that we are operating as efficiently as possible, according to accounting best practices, in compliance with all regulations, and paying close attention to our financial health and longevity for the benefit of our clients and employees.
Mark Paronich is CFO of Delphi Construction, Inc.