So Your Contractor Just Went Bust
Welcome to The Real Estate Espresso Podcast, your morning shot at what’s new in the world of real estate investing. I’m your host, Victor Menasce. On today’s show, we’re discussing a very real risk that affects real estate developers and property owners alike. It’s always been a risk that a contractor might go out of business. Contractors have been known to get themselves upside down financially for several reasons, like a client not paying them on time or poor financial management. Contractors then attempt to keep their business afloat by obtaining new projects. Often, by the time they realize they’re out of funds, they have already begun robbing Peter to pay Paul, leading to a downward spiral.
However, the problems do not solely lie with contractors. In fact, we’re currently seeing problems with several subcontractors more frequently. Over the past day, I’ve heard of numerous subcontractors in financial difficulty. Fortunately, none of our projects are impacted. Yet the risk is always lingering. It’s happened to us in the past.
When a subcontractor is on the verge of going bust, they often request advance payments to procure materials, or you’ll notice unexpected delays in the labor and materials’ supply to the site. Recognizing these warning signs of a subcontractor’s financial distress can help mitigate the risk of potential disruption and financial loss. Here are some things to watch out for:
Delayed payments to suppliers and employees, frequent complaints from suppliers or workers about unpaid invoices, unusual increases in requests for upfront payments or excessive change orders, requests to alter original contract payment terms, notices of liens or lawsuits or other legal actions relating to unpaid bills, declining work quality, a reduced workforce onsite, high turnover of key staff in the subcontractor, frequent delays or stoppages, materials not arriving on time, equipment disappearing from the site, changes in communication or behavior, negative industry feedback through the rumour mill, and finally, late filing of accounts and late financial documentation.
Project owners and general contractors need to vigilantly monitor for these signs and take proactive steps to protect their projects, minimize financial risk, and ensure careful cash management during construction. This includes careful payment and paper trails with all contractors.
If a subcontractor goes under, the project is likely to stall while the general contractor finds a replacement, leading to higher costs, longer lead times, and increased holding costs. It’s crucial for owners and the general contractor to work closely together and monitor the project considering all the aforementioned points. One practical solution if you can’t commit full time to the project is to hire an owner’s representative; this is a common practice at the institutional level.
Some projects are bonded, which can provide the extra funding required to protect against contractor failure. So as you think about this, have an awesome rest of your day! Go make some great things happen, and we’ll talk again tomorrow!
Stay connected and discover more about my work in real estate and by visiting and following me on various platforms:
Real Estate Espresso Podcast:
- 🎧 Spotify: The Real Estate Espresso Podcast
- 🌐 Website: www.victorjm.com
- 💼 LinkedIn: Victor Menasce
- 📺 YouTube: The Real Estate Espresso Podcast
- 📘 Facebook: www.facebook.com/realestateespresso
- 📧 Email: podcast@victorjm.com
Y Street Capital:
- 🌐 Website: www.ystreetcapital.com
- 📘 Facebook: www.facebook.com/YStreetCapital
- 📸 Instagram: @ystreetcapital
