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How does ineffective financial management lead to contractor failure?

Many people believe that the majority of the risk is with the performance bond; in fact most claims are on the payment bond.  Especially in today’s economy, contractors are at risk of job cost borrowing in order to keep their company from bankruptcy.  Contractors are notorious for running out of the necessary cash to complete their projects.  They can be put in this situation due to a few bad estimations which lead to higher job costs than anticipated.  Their materials can cost more than they had estimated at the time of the bid.  Or the contractor makes some money they proceeds to suck it out of the company for personal use.  No matter the reason, it leads many contractors to use funds from one job to pay the vendors for the previous jobs.  They can maintain the vicious cycle as long as they always have new work coming in the door, once the work slows then they can no longer keep the collectors from knocking on their door and placing claims on their bonds.  A contractor needs to double check every bid amount, lock down materials and labor prices, and keep their spending habits in check.  They way the contractor has their own cash reserves to start working on a project until the first pay check is sent out, which is often 30-60 days after the job has started.

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