Controlling Risk in Long-Term
Contracts
Long-term contracts can be lucrative for contractors, but sureties can be
nervous about the many risks associated with such commitments. Contractors
can take a variety of steps to protect their businesses and reassure
sureties when assuming the risks of long-term contracts.
Subcontractor or Supplier Default
What happens to your firm and to the project if a subcontractor doesn’t pay
a vendor? You waste valuable time and resources trying to sort out payment
issues and terms. Joint check payments with the subcontractor are a way to
reduce risk on those occasions when large amounts of construction supplies
or equipment for the project must be purchased. As always, the best way to
mitigate risk with subcontractors or suppliers is to perform an in-depth
review of their background and their performance history. If that review
identifies any red flags, then you should be very careful about working long
term with them.
Rise in the Cost of Materials
The prices of timber, cement, asphalt and other construction materials all
fluctuate depending on a variety of local, national and global market
conditions. Very large contractors attempt to protect themselves from these
fluctuations by hedging. Smaller contractors have fewer options and less
flexibility. However, if you are a smaller contractor, you can engage in a
form of hedging by agreeing to pay suppliers a locked-in price for products
and materials up front. You pay the agreed-on price irrespective of whether
the price of the materials rises or falls.
Outside Events
Before accepting a long-term contract, consider the project’s location.
Weigh whether a proposed project’s location has the potential to create
unforeseen and potentially costly problems related to oversight and control.
What may initially appear to be a very profitable project may end up
actually costing you money. Take a pass on a project if it is so far from
your home base that you may not be able to keep adequate tabs on its
progress.
Work-In-Process is provided by
Somerset for our clients and other interested persons upon request.
Since technical information is presented in generalized fashion, no
final conclusion on these topics should be made without further review.
For additional information on the issues discussed,
please contact
Ken
Hedlund,
Jay Feller,
Steve George,
Chris
Mayfield or
Rebecca Ogle
of our
Construction & A/E Team.
This document is not intended or written to be used, and cannot be used,
for the purpose of avoiding tax penalties that may be imposed on the
taxpayer.
Somerset CPAs,
P.C.
3925 River Crossing Parkway, Third Floor
Indianapolis, Indiana 46240
317.472.2200 • 800.469.7206 • FAX 317.208.1200
www.IndianaConstructionCPAs.com
info@somersetcpas.com
