Subcontractors in Distress
Among the darkest clouds looming over 2011 for the New York region�s construction industry is the state of subcontractors � and how many of them may falter this year.
“The subcontractor community is starting to see the wear and tear of this recession,” says Joe Hogan, v.p. for building services at the Associated General Contractors of New York in Albany. “The risk of subs defaulting on projects is getting greater, and [general] contractors now have to look for signs of stress.”
Contractors and subcontractors generally aren’t the best judges of their own limits, says Mike Kolakowski, CEO of KBE Building, a contractor based in Farmington, Conn. “Some guys are just trying to hang on and really taking on work a whole lot cheaper than they should,” he says. “These are subs that had been profitable and had big backlogs of work in the past, but the concern in this market is will they be around to complete projects of long duration?”
Subcontractors – all across the marketplace, regardless of trade – are indeed taking jobs just to keep their crews together and funding work out of their reserves, says Ron Berger, executive director of the Subcontractors Trade Association of New York City. And the ones in the most dire shape are filing for Chapter 7 or Chapter 11 bankruptcy, with more than a half dozen at the end of the year and more to follow in 2011, he adds.
The biggest problem they all face is cash flow – and the inability to get paid on time from contractors and owners, Berger says, citing examples of projects on which subcontractors haven’t been paid for more than a year and a half. “There is so little work out there, and we’re laying out large sums of money for materials and labor but waiting unreasonable amounts of time to get reimbursed,” he says. “It’s just not fair.”
Berger says the public sector, where most of the work is today, is actually worse on payments than the private sector, noting that the N.Y.C. School Construction Authority has thousands of unresolved change orders running into the hundreds of millions of dollars.
AGC’s Hogan says anything that contactors can do to help the subcontractors on their jobs is bound to reduce project risk. He says some subcontractors have begun to not pay their own bills to suppliers and labor funds, but if they go under, the contractor in some cases could find itself on the hook for the unpaid balances. “Make sure that the money is flowing,” he adds.But contractors should also seek transparency about finances from their subcontractors, he adds. “They have to watch for the signs,” Hogan says. “Ask the sub to be open about the books, or consider issuing joint checks or making other adjustments. It’s a time of real caution.”