Simple Solutions Blog

The top 5 reasons for contract failure

 August 14, 2023     UFG Insurance    Surety  Read Time: 5 min


The construction industry has always been tough, but a variety of new headwinds are Contractors face several challenges these days, from attracting and retaining skilled employees, to managing supply chain issues and rising costs of materials. Choosing to work with a knowledgeable team of surety professionals can help a contractor navigate these headwinds to lower the risk of contract failures. 

Every contract failure has its own unique factors at play, but there are five core issues the surety industry tends to see most often when responding to surety bond claims

  1. Market focus or experience issues. 
  2. Business continuity challenges. 
  3. Overextension of the business.
  4. Internal systems and control deficiencies. 
  5. Subcontractor issues.

Here’s a breakdown of these project risks, and how a trusted surety agent can help your business navigate them with more ease. 

1. Market focus or experience issues

Knowledge of the market is one of the biggest determinants of success for just about any business. Owners and managers need to know as much as they can about their customers to offer a competitive, desirable product, and the learning never stops as the market evolves.  

For contractors with limited time and resources, the amount of research needed can be overwhelming. You need to learn everything from customer pain points and preferences to local competitors, suppliers, officials and more — and that’s just in one market. Those data points multiply quickly when a business operates in several markets or sectors.  

And if you’re a contractor who ventures into geographic regions that are unfamiliar, there’s another layer of new-to-you to consider — everything from changes in soil conditions and weather patterns to the nuances of a local market can have an influence on contract outcomes.

That helps explain why market-focus issues play a factor in a large majority of contract failures. Most contractors would prefer to focus on their trade, but even the most exceptional contractor can’t prevent a failure if they don’t understand what their client needs and expects. This risk is especially high when branching into unfamiliar markets or building sectors, which is why it’s so important to rely on your business team to gain market knowledge quickly (more on this later). 

2. Business continuity challenges

Business continuity challenges can refer to a few different problems contractor businesses may face during operation. These include: 

  • Developing and maintaining business continuity plans in the event of a disaster or catastrophic event that temporarily closes the business. 
  • Managing ownership and leadership transitions to ensure smooth business operations. 
  • Attracting and retaining the managers and employees needed to grow the business. 

While these challenges are all slightly different, they have a common root in poor communication and planning. For example, if employees don’t communicate and follow the established disaster recovery plan, valuable time and resources may be wasted. If owners can’t agree on a transition of leadership, there can be quality control and morale issues downstream as management weakens. 

Your surety agent will be looking for signs that you have qualified people in key positions, and that you have established plans for ensuring the company’s financial and operational continuity. Not having these could very well result in a contract failure if your company is caught in a big disaster or personnel change. That’s why it’s never too early to begin business continuity planning. 

3. Overextension of the business

Overextension refers to the act of stretching a company’s resources or capabilities beyond sustainable limits. It’s an especially common pitfall for contractors working in more seasonal sectors, who face the temptation to book as much work as they can for the warmer months.  

The biggest challenge related to overextension is cash flow, as doing too much at once can lead to a cash crunch as expenses pile up and invoices stretch out. Surety companies often compare a contractor’s recent annual revenue growth rates with “established” growth rates in the same market and ask a lot of questions about rising project values to get a sense of how sustainably a company is growing. 

Overextension isn’t just a financial concern, however. It can also lead to longer-term brand harm if not managed early. Pushing employees to do more with the same amount of time and resources can lead to compromised quality, increased injuries and surety bond claims by unhappy clients. Unchecked, those problems raise costs due to higher insurance and bonding rates, erode a company’s reputation and ultimately send customers elsewhere. 

4. Internal systems and control deficiencies

Successful contracting isn’t just about mastering hand tools — it’s also about mastering internal business controls and systems that keep your business on track. This is an important but often overlooked point for many contractors who would rather focus on project work, but your long-term viability depends on it. 

Companies with weaker internal controls have less visibility on their financial picture, project costs, staffing, compliance and more. That increases the potential for contract failures as management loses track of their work. 

Your surety agent may take an increased interest in your operations and business tools than other members of your professional team, and that’s because it speaks to your company’s capacity and ability to complete projects successfully and according to their contracts. As a company grows and requires more bonding capacity, your surety agent will want to make sure your internal processes and controls can handle the increased demand. 

5. Subcontractor issues

The use of subcontractors is often inevitable as a contractor grows and takes on larger projects, but it also adds a layer of risk that must be carefully managed.

Subcontractors (commonly known as “subs”) work at the direction of a general contractor, but they are still independent businesses. That means they bring their own financial difficulties, staffing problems or safety violation history to your project. They may also lack adequate insurance or bonding capacity of their own, potentially exposing your company to more risk than initially anticipated. 

Contractors without the right vetting and prequalification processes can miss these red flags and introduce unnecessary risk into their operations. Miss a big enough issue, and your business could face a costly legal or surety bond claim.  

How your surety agent can help

Even the best contractors can only focus on so much during the busy season. Running a successful business requires a team of professionals who can help you assess and plan for the above risks. That includes experts like lawyers and accountants, but also insurance and surety agents, who specialize in analyzing risk. 

Your surety agent can offer industry and market insights that can help your contracting business as it grows and expands, as well as financial and business process guidance that can help you strengthen your operations and grow your project capacity. 

In the unfortunate event of a surety bond claim or contract failure, they can also help you navigate the claims process, provide guidance on your rights and responsibilities, and advocate on your behalf. A good surety agent is a partner that can protect your interests and help you avoid failure. 

If your contracting business needs a surety expert to help navigate its next phase, reach out to one of UFG Surety’s independent surety agents for responsive, trusted and knowledgeable help. 

The information provided is for informational purposes only. Every attempt is made to ensure that the information is accurate; however, it is not intended to replace professional advice. For more information, see Disclaimers & Other Legal Documents.