Risk Avoidance: What You Should Know About Your General Contractor’s Financial Practices
Let’s face the facts. For most construction projects, the selection of one (similarly qualified) General Contractor over another is driven largely by their bid, unless a previous relationship to a GC outweighs the pure bids. Of course owners and developers typically do some due diligence of each GC in terms of the comprehensiveness of the quote and related leveling as well as their track record of successful delivery on projects of a similar size and program. Most will even put invited bidders through at least a rudimentary financial pre-qualification process prior to issuing an RFP. But in terms of risk management, these steps 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 4 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 have never been drawn against. Cash is cash, a credit line is a potential debt.
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.
As CFO, my job is to avoid risk for both my company and for our clients. That is why 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 who(m) we are certain to have the financial wherewithal to pay their suppliers and their second tier subs. We also diligently track who subcontractors are actually using for third tier subs 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?
Even small solo contractors get insurance before they put lettering on their truck, but when you work in major markets like healthcare, assisted living, multi-family residential etc. the bonding and insurance picture gets a little more complicated and the details a lot more important.
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.
By Mark Paronich, CFO, Delphi Construction, Inc.
Mark Paronich, CFO, Delphi Construction, Inc.
Mark has been the Chief Financial Officer at Delphi Construction since 1995.
In his role as CFO, Mark is responsible for the financial operations of the company. Mark develops and maintains key relationships with Delphi’s surety and insurance providers, banking institutions and a variety of other vendors. He actively works with internal management, subcontractors, and other parties to assess and minimize risk for the company and its clients. Mark also oversees and manages Delphi’s annual audits and financial reporting. In addition to his daily financial responsibilities, Mark also oversees our Human Resources department and takes an active role in many technological implementations within the company.
Founded in 1992, Delphi Construction is a multi-market Construction Manager, General Contractor and provider of Specialized Preconstruction Services. The company serves clients from its offices in Waltham and on Cape Cod. Delphi is active across multiple construction markets including Healthcare, Independent and Assisted Living, Education, Commercial, Religious, Multi-Family Residential and Affordable housing. Delphi's client-focused, Partner-oriented approach and commitment to Building Responsibly™ has won the loyalty of owners and architects throughout New England. 90% of the company's business over the past 25 years has come from repeat clients and their direct referrals. Delphi was recently named one of the 25 Largest General Contractors in Massachusetts by the Boston Business Journal.
Delphi Construction >>