Financial Investigations

For a subcontractor, investigating the financial stability of a project and its owner can be as important as securing the contract. Access to financial information is more of a right rather than a privilege. Nevertheless, many subcontractors, always fearful of losing a contract, do not investigate financial stability. Failing to acquire these financial details can make the difference between profit and loss on a project.

The objective of a project financial investigation is to ensure that sufficient funds will be available not only for the original job specifications, but for any change orders that may increase the project's costs. The key is to obtain as much information as possible about the primary contract between the owner and the general contractor. Subcontractors should ask for provisions in their agreements with the general contractor giving them access to financial information about the owner and the project.

Sources of Financial Information. There are a number of sources of financial information that a subcontractor should obtain and examine, including the following:

  1. The Contract: The agreement between the general contractor and the owner.
  2. Owner Information: Identify the owner, its legal structure, and the ultimate responsibility for payment. It is particularly important to obtain information on land ownership and financing, including the construction loan agreement and the lender's "set-aside" letter, which specifies the amount of money borrowed and set aside for construction costs.
  3. Contractor's Qualification Statement: This form is used by the owner to evaluate the general contractor's qualifications. Pay particular attention to references, surety information, and payment history.
  4. Financial Questionnaire for a General Contractor: This American Subcontractor Association (ASA) standard form should provide the subcontractor with vital information about the project and the general contractor's financial history.

This information provides a subcontractor with details on the financial structure and stability of each project. Although the subcontractor's most important relationship is with the general contractor, complete disclosure will reduce the likelihood of unexpected problems.

Specific areas the subcontractor should investigate include:

  1. The general contractor's track record of payment. Does the general contractor have the funds to pay its subcontractors in the event the owner doesn't make payment?
  2. The owner's organization and history. Does the owner trade under a different name? Are you dealing with the well-known company or one of its subsidiaries?
  3. Is the project bonded? Has the general contractor provided the owner with a labor and materials bond to guarantee payment of suppliers and subcontractors? Is the bonding company financially stable?

Remember the motto of our Annual Retainer Program, i.e., "The best way to deal with a problem is to prevent it in the first place." If you have any questions, please contact us.