When a turnaround professional is engaged to assist a company that operates in
an industry with the second-highest
default rate in the United States—
contracting—he or she can be sure
of a challenging assignment ahead.
Clearly, completing an engagement
to turn around a contractor is
a particularly specialized and
difficult proposition. In addition
to unique stakeholders that can
jeopardize the continuity of a
contractor client, including sureties,
subcontractors/suppliers with lien
rights, and unions, the difficulty of
a contractor turnaround is often
magnified by a bank that is not
accustomed to dealing with the
specialized risks of contractors.
The reason a turnaround professional
is likely involved in the engagement
in the first place is because there
are few, if any, secondary sources of
liquidity/financing for a contractor
in distress. There are no asset-based
lenders or factoring companies and
very few mezzanine debt/private
equity investors that choose to play in
this industry. Who can blame them?
Even the U.S. government has very few
programs to support an industry that
literally builds its own infrastructure.
This article discusses a framework
for dealing with the lending
institution of a contractor client
during a turnaround. There are
two different phases related to
contractor turnaround engagements:
assessment and transition. First, a
turnaround advisor must perform
the appropriate reviews, analysis,
and consultation to assist both the
bank and the contractor to reach
an understanding of the present
situation and future plans. Second,
a transition plan must be executed
to either return the contractor to the
line lending group at the incumbent
bank or seek a replacement lender.
A bank is likely to seek the assistance
of a consultant based on the receipt
of financial information that, from
the lender’s viewpoint, indicates that
the contractor’s ability to continue
to operate is in jeopardy. This may
include a sizable net loss, a significant
expansion in underbillings, or a major
contract dispute—any or all of which
can lead to a loss of confidence by
the bank. Therefore, the natural first
step in the engagement is to address
the source of the bank’s discontent.
This assessment phase includes a
variety of reviews and discussions
intended to provide a solid base
for suggesting the best path for the
contractor and the bank to either
continue operations successfully
or liquidate the company. For
purposes of this article, only the
former will be discussed. The
assessment of a contractor should
include the following topics:
Corporate Overview. This includes
a summary and history of company
operations covering trends in revenue
with sources of major revenue
streams segmented by geography, job
type, major customers, bonded vs.
nonbonded, and contract type (hard
bid vs. negotiated); an organizational
chart; and background information.
A second part of the overview is to
provide a breakdown of ownership/
management, including resumes
of key personnel and information
concerning their areas of operational
practice within the company. The
review of these team members is a
paramount portion of the engagement.
Not only the operational proficiency
of each of the team members, but
also the interactions within the
company will prove invaluable in the
transition phase recommendations.
Finally, the overview should provide
highlights of end customers and
markets served by the contractor
and cover topics such as the
geographic spread, competitors,
and the trends in available work.
Work in Progress Review. For
a contractor, the most plausible
source of information for identifying
performance issues resides in the
work in progress (WIP) schedules.
Changes in the income statement and
operating balance sheet accounts for
a contractor are all driven through the
WIP schedules. Since a contractor’s
financial statement is largely based
on estimates, this is the area most
subject to manipulation/adjustment.
This unique reporting methodology
is typically not within the expertise
of most commercial lenders.
The WIP review should include
a two- or three-year analysis
of quarterly historical WIP
schedules with a focus on:
• Margin improvement/fade
for all major contracts from a
• Gross margin by job
type and by owner.
• Trends in underbillings, especially
if jobs depict gross margin fade.
• Whether certain estimators/project
managers produce significantly
different contract margins.
• Average job duration analysis.
• Percentage of self-perform.
For example, a sizable contractor
reported its first fiscal loss in 20-
plus years in 2012. The loss was
attributed to one bad job, Job A, which
was unique in nature from both
a job type and contract format. At
completion, the contractor recognized
a loss on the contract that led to a
10 percent reduction in equity.
However, Job A was not the true
problem and instead masked
recognition of the real problem by
both the bank and contractor. An
underbilling was also accumulating on
a specialized, large contract that was
three times the size of the loss related
to Job A. The contractor had more