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.

“Before accepting a long-term contract, consider the project’s location.”