Signs when your client or general contractor might go bankrupt
General contractors very rarely go bankrupt, but still, from time to time, some of them do. Usually at higher risk are those general contractors whose company age is around 20 years +/- 5 years. Because at that age, companies are having management changes. Those who started the company are giving control to new management, and things can get tricky. Also, when reading many balance sheets, large general contractors can suffer losses for many years before going bankrupt. Usually they are changing management strategy and improving business processes, which in most cases bring results. But they have suffered a lot and the dent to their balance sheet will stay long. But what are the signs that your general contractor might go bankrupt?
Frequent changes in management
If the general contractor is facing a significant cash flow issue, this will mean that management is ordering project managers and site managers to go hard with their subcontractors. They usually don’t have enough cash to pay everyone on time, and project managers or site managers may not be able to withstand the pressure from subcontractors about payments and invoices. They are making promises that soon payment will come while meanwhile looking for another job. It could be possible that you start to see that every 3–4 months you will see a new site manager or project manager from your general contractor. Although the board of directors and CEO usually stay until bankruptcy You will most likely see changes in middle management and key roles. Especially for the persons who are dealing and communicating with subcontractors and are responsible for payments.
Lack of communication
Your general contractor will start to forget your questions, answer in the late evening, and not devote significant time to your needs. He will have so many ongoing issues in mind that usually their phones and emails are hot and they can hardly focus on what should be done next, because current issues are too much to handle. But this is not always the case, because lack of communication also happens when work is poorly managed. Before making any observations, check the balance sheet of your general contractor.
Check their liabilities
It depends on which country you are in. But you can check whether the company has unpaid taxes or other late invoices. Late invoices can be seen through insurance companies, or they could even have open cases in court about late payments. If the invoices are insured, the general contractor usually knows that, and they will do whatever it takes to pay those invoices because if they start to miss them, they will lose credit rating score. Losing their credit rating score will also cause them to lose credit lines, hence putting even more pressure on their cash flow. If you see that they have ongoing court cases, be reasonable and check their balance sheet. If their balance sheet is OK, then they could have this court case because of disagreements between subcontractors. The number of court cases is not always the case, but this must be analyzed.
Approval of additional works
This may sound strange, but once your client faces a cash flow issue, he will also start to mismanage additional work. He could be too strict and not allow you any additional works or confirm them. Basically, anything that will come up will be rejected, or he can approve them mutually and forget about such discussions. But once you start to see staff rotation, you will also start to see mismanagement and the ease with which every single piece of additional work is approved. It takes time to acquire good staff. If you start to see how easily they approve additional works and how much money you will make on them., Be careful, because you might not get all of that money. This usually shows signs of the last few months for that company.
And of course, if you notice late payments too often, you should review your client’s balance sheet once again. You may start to hear promises from your general contractor about payments, that an invoice is stuck in their system, that the person in charge is on vacation, that they are waiting for money from their client, and more.
Luckily, general contractors are not going bankrupt as often as clients or subcontractors can. Usually they have strong balance sheets, or if problems start to arise, they can last for years before going under. But if you notice due payments, do check their balance sheets, talk to other subcontractors, and you might try to talk with his client. Be careful when talking with his client because you don’t want to send the wrong message.