Mitigating the Risk f Subcntractr and Supplier Default AGC Natinal Leadership Cnference September 30, 2013 2013 Textura Crpratin
Agenda Intrductin Default Risk in 2013 Prtecting Yurself frm Default Qualificatin Bid Leveling and Buyut Prcess Perfrmance Security Managing Payments and Lien Risk Risk Management Plans Wrap up and Questins 2013 Textura Crpratin 2
Factrs Driving Increased Default Activity Ecnmic Cycle is different and multifaceted in cnstructin Lwer lws and higher highs Cycle trails general industry by 6-18 mnths Residential vs. Nn-Residential (Building vs. Civil) Dwnturn f 2008-2011 was a time f LOWER default risk Mst GCs and subs carried large, high margin backlgs ut f the bm Tk n new wrk n lw margins but had strng cash psitins Bid prices drpped rapidly replacing a defaulted cntractr smetimes invlved a prfit!!! Recvery f 2011 - Tday The Marginless Recvery Culling f the heard Strng Stable Stable Weak Weak Bankrupt Fade Away 2013 Textura Crpratin 3
Why and Hw t Qualify Subcntractrs Qualificatin can lead t better decisins Avid buying ut subcntractrs likely t default Understand wh yu are ding business with Mre transparency int purchasing decisins Build risk management plans arund weaker subcntractrs Manage aggregate risk t subcntractrs and suppliers Things t cnsider in a qualificatin prgram Pre-Award, Pre-Bid, Onging Centralized/Decentralized Subcntractr s perspective 80/20 Rule Technlgy and utsurcing Gathering infrmatin r reviewing it? 2013 Textura Crpratin Private and Cnfidential 4
Qualificatin in Cnstructin Tday General Cntractrs Subcntractrs 2013 Textura Crpratin 5
Challenges with Qualifying Subcntractrs Qualificatin is nt yet accepted in cnstructin Getting subcntractrs n bard Keeping the database current Resurces are limited 2013 Textura Crpratin Private and Cnfidential 6
Building a Qualificatin Prgram Sme f the main aspects f a successful qualificatin prgram: Prgram missin statement and gal develpment High level prgram design (pre-award, pre-bid r nging; centralized/decentralized review, etc.) Cmmunicatin planning and executin (internal and external) Detailed prgram and frm design Subcntractr nbarding Mnitring & Evaluatin Peridic redesign and redevelpment 2013 Textura Crpratin Private and Cnfidential 7
Perfrmance Security Owner Optins Bid bnds Perfrmance and payment bnd Parent cmpany guarantee Letter f credit GC Optins Subcntractr bnds Subguard /SDI Letter f Credit Persnal Guarantee/Indemnity Owner indemnity Lien rights (upstream) Subcntractr Optins Material supply bnds Lwer tier sub bnds Lien rights (upstream) 2013 Textura Crpratin Private and Cnfidential 8
Bid Leveling, Awarding Wrk and Cntracting Bid Slicitatin, Leveling and Analysis Getting enugh bidders but nt t many Bidder de-scping best practices When Hw Selectin and Awarding Wrk Lwest vs. best value Just in time qualificatin Letters f Intent Cntracting Standard Terms Scpe f Wrk Befre yu start 2013 Textura Crpratin Private and Cnfidential 9
Managing Payment Risk Risk exists n all sides f the cnstructin invicing and payment prcess Over and underpayment risk at all levels General lack f transparency (Archaic) exchange f paper dcuments fr paper checks Getting it wrng can be catastrphic Overpayment t a subcntractr wh defaults Owner r GC bankruptcy leave unsecured creditrs Fraud is (unfrtunately) cmmn Csts f mnitring and cmpliance are substantial n all sides The Imprtance f the Schedule f Values Getting enugh detail Lk fr frnt end lading and verlading specific items Agreeing t an SOV and signing it ff SOV and Payment Applicatins PMs rle vs. Superintendent Cmmunicatin Reviewing the mnthly pay applicatin The pencil cpy and revisins 2013 Textura Crpratin Private and Cnfidential 10
Technlgy Can Help Manage Payments and Reduce Risk What services are available? Business prcess cnsulting Sftware service prvider sales r implementatin services What Technlgy is ut there? Dcument imaging Electrnic invicing Electrnic payment systems E-signatures Multisystem integratin Hw d yu chse technlgy? Yur needs and yur attitudes Pint slutin vs. industry slutin Installed sftware vs. SaaS Calculating yur return n investment Managing yur IT implementatin Including key stakehlders Understanding implementatin csts vs. maintenance csts Dn t buy just because they are selling Buying technlgy AND supprt 2013 Textura Crpratin Private and Cnfidential 11
Risk Management Plans What is a Risk Management Plan? Dwnstream RM Plan Security (Bnd, LC, PCG, PI, OI) Payment Management Additinal Retentin Jint Checks STLW Early Pay/Reduced Retentin Prject Management Additinal Supervisin Weekly Meetings Weekly/Mnthly Schedule Review/Sign f Safety Management Upstream RM Plan Actively manage lien rights Direct payment frm wner/gc Reduced retentin 2013 Textura Crpratin Private and Cnfidential 12
If it All Breaks Dwn What happens in 2013 when a sub fails t perfrm: And that was the easy part 2013 Textura Crpratin 13
Then Optins are Limited Turning a Default frm Gray t Black and White Always start with the cntract Getting cmmitments in writing Ntice t cure Pst Default Optins Default and terminate Default and reduce scpe Default and supplement Default and hire wrkfrce/management Managing Replacement Wrk Time and material vs. lump sum Keeping track f csts Keeping the prject n schedule Other Cnsideratins Perfrmance security and default Default and the wner 2013 Textura Crpratin Private and Cnfidential 14
Summary Default risk will be elevated fr next 24 mnths All parties are at risk Knwn risk can be better managed than unknwn Sme key steps t reducing risk Qualificatin prgram Bid leveling and cntracting Perfrmance security Managing payments and cash flw Risk management plans Risk is there Manage it! 2013 Textura Crpratin Private and Cnfidential 15
Jnathan Hallran EVP, Client Services 1405 Lake Ck Rad Deerfield IL 60015 (T) 847-235-8415 (C) 773-372-4657 jnathan.hallran@texturacrp.cm 2013 Textura Crpratin Private and Cnfidential 16