Published here February, 2005.

A Little Foresight Goes a Long Way | It's Never Too Late to Change Strategy
Choosing the Right Response

A Little Foresight Goes a Long Way

A well-established general contractor won a very competitive three-year contract for extending a public sewage treatment plant. Mechanical and electrical work were subcontracted and represented about 15% and 2% respectively. Construction proceeded well until the electrical contractor suddenly went bankrupt. The cost of recovery added another 2% to the cost of the main contract, substantially eroding the general contractor's profit margin.

Investigation of the bankruptcy revealed that both the electrical and mechanical subcontractors were involved in another large contract that had apparently gone sour. This gave rise to a significant probability that the mechanical contractor might also find itself in trouble, although there was no indication of that at the time. A two-pronged risk approach was adopted consisting of an "early warning system" and a "response plan".

The early warning system was established by subscribing to a credit bureau that would report confidentially on the financial condition of the mechanical contractor on a weekly basis. The response plan consisted of making the necessary union arrangements to enable the main contractor to protect all materials and equipment on site that would be otherwise sequestered by the bankruptcy receiver. The main contractor also made plans to take over the work instantly should the mechanical contractor collapse.

About a year later, the mechanical contractor went under. The early warning paid off, work crews were immediately transferred to the main contractor's payroll, and work continued with less than an hour's interruption. To the relief of the main contractor's owners, the end of the contract even brought in a small profit.


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