General contractor due diligence

A buyer under a letter of intent has the window it sets to confirm what the seller has said. In a general contracting business, look past the equipment to the contracts, to who owes what on finished and unfinished jobs, and to registrations that can lapse. This page sets out the documents to request, the searches to run and the findings that should change the deal. For the general method, see due diligence and the wider trades business due diligence guide.

The contract file

Request every signed contract in the backlog, with change orders, payment applications and the correspondence about any dispute. For each, note the parties, the scope, the payment terms, the holdback position and any clause on assignment or change of control. Request the subtrade agreements for live jobs and ask whether each has been paid to date. Request bid files for pending tenders and the tender requirements the company has met. Compare the contract list against the schedule the seller gave you, and ask about any difference. Ask for the work-in-progress report and check it against the contracts and the billing records, job by job.

Registry and licence searches

Search for security interests against the company and its equipment. Ontario’s Access Now service lets you find out whether a lien has been filed in the province’s Personal Property Security Registration system. The same Ontario page says that if a loan secured on the property has been repaid, the buyer should insist that the seller require the lender to promptly register a discharge before the sale is completed. British Columbia’s Personal Property Registry records security interests and liens against personal property belonging to businesses and individuals under that province’s Personal Property Security Act, and Alberta runs its own personal property lien search. Other provinces run their own registries, so search where the company and its equipment are. In Quebec, the Régie du bâtiment du Québec’s licence section includes a page to check the validity of a licence.

Workers’ compensation and licences

Ask for a current clearance from the relevant board for the company and the subtrades on live jobs. In Ontario, the WSIB’s policy says a clearance is valid for up to 90 calendar days and is renewable, so one from months ago proves little. The same policy says principals and contractors must keep a record of clearances for at least three years from the date they were obtained, so ask the seller for the clearances it holds for past subtrades. Ask the seller to explain any account that is not in good standing. Where the company does electrical work itself, confirm that the Electrical Safety Authority licence is current and that a Master Electrician is named, because ESA says only licensed electrical contractors may do electrical work for hire in Ontario.

Bonding and insurance

Request the surety’s current schedule of bonds outstanding, the company’s most recent work-on-hand report to the surety, and any correspondence about its capacity. Ask whether the surety has been told about the sale and what it has said about supporting the company afterwards. Request the insurance policies the company carries, the certificates it has given to clients, and its claims history. Compare what the contracts require the company to carry with what it actually holds, and ask a broker to explain any gap before closing.

People and dependence on the owner

Request an organization chart, the employment agreements for the project managers and estimators, and a list of who signed, priced and managed each recent job. The point is to learn how much the company depends on the owner. Ask which key people have restrictive covenants and which have none. Interview the project managers if the seller allows it, and ask clients who work with the company how they would feel about a change of owner. A contractor whose staff and clients are tied to one person is a different risk from one where several people carry the work.

Findings that stop or reprice a deal

• Unresolved lien notices or deficiency claims on completed projects: the buyer may be taking on a dispute whose cost is not in the price, so ask for it to be settled, held back or excluded.
• A surety that will not support the company under new ownership: the backlog may not be bondable, so the work the company can bid after closing may shrink.
• Backlog that depends on the seller’s own relationships: the contracts may not survive the handover, so tie part of the price to the work actually completed.
• A workers’ compensation account not in good standing, or missing clearances for subtrades: ask which liabilities the buyer would inherit.
• No project manager who can run jobs after the owner leaves: price in the cost of hiring one, or ask the seller to stay on for a defined period.