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Contractor Check: Is Your Contractor Credit Worthy?

Contractor Check: Is Your Contractor Credit Worthy?
Pat Dickson - Mon Mar 26, 2012 @ 02:38PM
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Don't do any work for a Contractor if there is an unacceptable risk he won't pay you. This is an obvious statement, but being reminded of such things often helps us remember what we already know when we need it. Also, in some cases we just assume the Contractor we are dealing with, either through a bidding process or contract negotiation, is financially sound. We can never make this assumption. In this day and age, you never know who will be filing bankruptcy or short/late paying his obligations next.

I'm not going to tell you how much risk you should take, but I will tell you to always research your contractor's credit worthiness through one or all of the following sources before you submit any bid or negotiate any contract/project terms. However, I do caveat that your Contractor is a customer, so be very subtle and polite when you are asking him for financial information about his business or confronting him with it. Hurt feelings can result in lost work. Not to mention, many big Contractor's will scoff at you should you ask them for or about their financial information. Proceed gingerly. Sometimes all you can do is get a Dun and Bradstreet report and cross your fingers.

Ways to Check and See if Your Contractor is Credit Worthy:

  • Find Your Contractor's d.b.a. and Official Business Name: If you don't know your Contractor's official or legal name and his d.b.a., or "Doing Business As" name, you may have trouble finding him through any of the below-listed means. My quick solution is to look at the contract the Contractor wants you to sign and find these names in the first couple pages where you will find a recital of the contracting parties' names. You usually get a copy of your Contractor's standard form contract with your bid documents, or your salesman may have it. If not, call the Contractor and ask to see his standard form contract. If he asks why, tell him you want to make sure you have all your bases covered when the time to execute the contract comes. Another alternative is to just call and ask for the Contractor's CFO, Controller or In-House Counsel. It is a common request.
  • Get a Dun and Bradstreet Report: My personal favorite third party source for information when doing a contractor check. I won't go into detail about how to use this report, but I will say signing up with D&B and learning how to read their reports and use their tools has almost always been worth the cost. In a nutshell, D&B summarizes and rates the financial stability and credit worthiness of most big contractors.
  • Obtain a Copy of Your Contractor's Bond: If you are a subcontractor on a large construction project, especially if it is a public works project, your Contractor likely had to guarantee his work for the Owner by bonding all the work, including the work of his subcontractors. A copy of this bond should be provided to you when you ask for a copy of the Prime Contract. When there is a bond in place, your financial risk is generally lower, but not always. Some such bonds will protect you, the subcontractor, but not always. It depends on what the bond guarantees. Only the Owner may be protected. Otherwise, how to interpret the ways in which a particular construction bond benefits you is beyond the scope of this Checklist. I can only say that if there is one in place, and there is wording in it which guarantees payment to subcontractors and gives them a process for filing a grievance with the Contractor's surety, you are likely in pretty good shape. If you are not paid for your work, you can always place a direct demand on your Contractor's surety. Of course, this raises another issue in today's climate. Is the surety solvent? Finally, I'll give one warning. In almost all cases it is advisable to talk to your Contractor before you file any grievance with his surety. I've seen a number of surety complaints ruin relationships. 
  • Search Corporate Filings: I always find a good contractor check includes examining his corporate filings in the jurisdiction or state where he is headquartered/registered/filed to do business. You can find out this information by taking the same steps I suggested above for finding your Contractor's legal name. His sample contract usually tells you where he is doing business right after the first official recital of his name. It will say something like "ABC Co., an Arizona Corporation." Knowing this, I go to the Arizona Corporation Commission website and look up ABC Co. See where it says "Business Entity Search?" Type in your Contractor's name and check out his records. Are all his filings current? Is he in good standing? If you see anything fishy, you should bring it up with your Contractor. Note that I have only linked you to the Arizona Corporation Commission, so this only shows you where to go in Arizona. Every state is different. Some states don't have online records, and some states don't have a Corporation Commission, so their corporate/business records are stored and published by their Secretary of State, or Controller, or other entity.
  • Look up Court Records: One sure way to find out if your Contractor is having a cash crunch or is short paying his subcontractors and vendors is to check and see if he is being sued/has been sued. Once again, I'm linking you to an Arizona source, the Maricopa County Superior Court Records, where you can search court records to see if your Contractor is busy at the courthouse. Take a look at the Civil Case Docket. Do a search "By Business Name." This is where many actions might be filed against your Contractor should he be headquartered in Maricopa County, Arizona. However, this search won't give you even a good part of the litigation your Contractor might be involved in should he do work in/order materials or subcontract in many other counties or states. It won't cover any Federal cases, or bankruptcy either. Also, not every jurisdiction puts it court cases online, but a lot more than half do in the larger metropolitan areas, per my anecdotal experience. Nevertheless, if your Contractor does business in multiple jurisdictions and you have the time to check with several online courts (be sure to include Federal District Court, County Courts) go to his web site and see if he publishes his locations. If so, practice searching the Web for court records in those locations. You'll be a pro quite quickly. Googling it is all I do. For instance, if I'm looking up a Contractor in Fremont, California, I type in my Google search: "What county is Fremont, California in?" Alameda County is my answer. Then I type in "Alameda County Superior Court Records and the first link I get in my search sends me to the Superior Court of California, County of Alameda. From there, you may or may not be able to find your Contractor through a name search, even if he has cases with the court. At first glance I was only able to find you could search by case #, but I will stop here with my online search because that's what I would do if this were a real exercise. At this point I'd call the clerk, listed on this site, and ask for any case #s my Contractor might be listed under. Learning how to find this information should give you a start towards being an expert at investigating the status of Contractor litigation. Now the question is, what do you do once you find your Contractor has a bunch of historic or ongoing lawsuits? My own approach depends on how well I know the Contractor and the relationship I have with him. If we have a history of friendly transactions, I just ask him about the court cases I found. If I don't feel it is appropriate to ask him directly, I call the parties he has sued or been sued by, especially if they are subcontractors or vendors. A final note is that it isn't only important to know about the cases which have been filed against your Contractor. You also want to know his history of suing his own subcontractors or vendors. If your Contractor has a history of suing 50% of his subcontractors for liquidated damages, this is good information for you to know. You may want to consider being extra cautious defining your Critical Path and work scope, and you may want to lower or exclude liquidated damages or your liability and risk downside when you negotiate your contract terms.
  • Contractor Check with the County Recorder: Checking county records more often than not involves the same process as checking court records, as discussed above. So, once again assuming we are in Maricopa County, Arizona, and also assuming your Contractor does all his business here, go to Recorded Document Search and type your Contractor's name in the field "Business Name." Here you will find a number of documents like Liens and Judgments. Liens are not always a big deal because some are filed just as a matter of course, and they are beyond the scope of this Checklist. However, recorded judgments should be perused, and any looking like red flags to doing business with the Contractor should be investigated. If appropriate, talk to the Contractor about anything you've found which merits concern. You can also contact the winning party for a more objective view than the one your Contractor is likely to provide.
  • Visit the Registrar of Contractors: Once again using Arizona as our source for examples, one of the best ways to investigate a Contractor is by going to the Arizona Registrar of Contractors and simply doing a "Contractor search by name, license number, status and/or classification." If there are any complaints against your Contractor, they will be listed as open, or resolved, and how they were resolved. In my experience, I have always found the Registrar helpful when I called to discuss any complaints which concerned me and I needed more detail.
  • Contact the Better Business Bureau: Just go to the BBBs website, enter your Contractor's name and location in the search fields, and you will quickly discover if there are any open complaints, or complaints filed within the last three years.
  • Subcontractor References: Find Subcontractors who have worked for your Contractor before, and ask them if they had any problems, especially with payment, liquidated damages, or an unfair burden when it came to cost overruns or schedule changes. You can find these references by asking your Contractor for them, but the best ones come from other sources. Your Contractor is very unlikely to give you any references which will say anything that isn't glowing. One way to do it is to just start asking around. One of your senior project managers can likely name a number of subcontractors who have worked for your Contractor previously. If he doesn't know, ask him for a reference to someone who might know. Make a few calls. It usually doesn't take a lot of detective work. One of your employees may have worked for your Contractor previously. Call the HR Department and ask if they know of any such person.
  • Internet Search: Search your Contractor's name on the Internet. You'll be amazed what you might find. In fact, in one of my recent searches, I found a plethora of information, in the form of former employee grievances, on Glassdoor.com
  • Ask for Current Financial Statements and Credit Line Status: This point probably should have been the first one I made, but in my experience, getting a Contractor's current financial statements or the status of his credit line is difficult at best. However, you never know. So always ask. Even if you can't get ahold of current financial statements, knowing your Contractor's credit line status can be very valuable. I don't have to say how, but if you are working on a $1m project and your subcontract is for $200k, and your Contractor has $100m of availability on his credit line, you will probably be ok as long as you perform work to expectations. Furthermore, if your Contractor is willing to provide you information about his credit line, a recent letter from his lender is a much more reliable document for obvious reasons.
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