I caught up with Steve Tenney, chief financial officer of Story Construction, the general contractor and construction manager based in Ames, Iowa, at the National Association of Surety Bond Producers convention in San Francisco. We talked about the risks of subcontractor defaults.

We were in the conference exhibition room in the basement level of the elegant Fairmont Hotel on Nob Hill. 

Tenney is national vice chairman of the Construction Financial Managment Association. He and Stuart Binstock, CFMA's chief executive, staffed CFMA's booth at the convention.

Both Story's bid business and agency construction management business, says Tenney, are going well as the recovery slowly gathers steam. I mentioned concern by other general contractors about subcontractor defaults.

Story doesn't require surety bonds from its subs, Tenney says. 

That's ironic, I thought, since we were meeting at a bond brokers convention.

Tenney says that without the cost of surety guarantees, Story gets more competitive prices from its subs.

Not only doesn't Story bond its subs; it doesn't perform that much formal due diligence before hiring them, either. That is, no review of audited financial data or three years of tax returns. In fact, Story doesn't review any financial data from its subs or look at any tax returns.

"Maybe we are insulated from [subcontractor defaults] on the coasts and have a stronger base of subcontractors, says Tenney.

If Story took an important subcontractor bid from a new or unfamiliar sub, Story would do some research and review that sub's performance in the marketplace, says Tenney.

"We wouldn't completely, blindly accept a number," he says. Among othe things, Story would check references and D&B reports.

But right now, the company has no formal subcontractor prequalification procedure.


Not really. Story works with many subs over and over and draws on a very deep fund of knowledge and experience.

"We haven't been burned yet," by a default, Tenney says.

Now, with all the talk about sub default and economic recovery risk, Story is preparing in case its current system of subcontractor risk control fails. The preparation includes the possible use of subcontractor default insurance, where that could work. 

Right now, just knowing its subs is the right risk-control policy for Story.