The Management of Contracts and Subcontracts - Case Study Example

?Business Strategy Table of Contents Table of Contents 2 Introduction 3 Recommendation as a subcontractor or main contractor 3 Recommendation to the subcontractor to become a main contractor 4 Supply to the company on credit or not 5 Possible solutions to the problems being faced 6 Conclusion 6 Bibliography 7 Introduction A contractor usually provides services to client or clients. This is usually at a given agreed upon fee, usually payable at the end of the sated period or upon the completion of the task. The duration is usually stated under the contract services. The contract is legally binding. On the other hand a subcontractor is the contractor appointed by the main contractor to carry out the activities within the main contract. This will range from an individual to an organisation. A contractor of a construction project can subcontract the electricity wiring to the subcontractor. Recommendation as a subcontractor or main contractor The amount of resources available would determine whether a company or an individual can be the main contractor or the subcontractor. The private family owned company would be better off operating as a sub contractor rather than a main contractor or even carrying out both the activities of the main contractor and the subcontractor. The operations of the company as evidenced by the financial statements indicate large amounts of sum that has been used to transact the liabilities. As much as the liabilities still run lower than the assets, the margin is very small and would not guarantee that the company will not incur losses soon. A company would consider being a main contractor or a subcontractor depending on the balance between the assets and liabilities. This financial statement is important to determine the profitability and the liquidity of the company. A subcontractor may decide to operate so not only because of the limit of resources but because the subcontractor is more specialised in a given section of the contract than the main contractor. The company’s decision to become a main or subcontractor should be based on the health and safety of the employees and workers of the organisation which would have been provided to give a judgement that is based on all the factors that affect the operation of the company. The taxation effect on the financial status of the company is a good projection of the liquidity of the company. The taxes have a direct effect on the profits. This is because gross profits are obtained after the taxes have been deducted. Recommendation to the subcontractor to become a main contractor This family construction company can get a recommendation as a main contractor to the subcontractor based on the capital and the potentiality of profit making. The capital level of one million at a cost of one dollar provides a stable ground for the operation of the company based on the assets available and the rate at which the company records the liabilities. As much as the liabilities are lower than the assets, the company can be entrusted with the activities of a main contractor. This would mean that the probability of obtaining losses would be based on the present state of operation of this company. The previous operation of the company would justify the operation of the company as a main contractor. This is because when it was operating as both a subcontractor and a main contractor it still could make some profit. This explains how much the company can take in its operation. Even if the profits were not that much, they have enabled the company to diversify its resources and invest in other related or similar ventures. In cases where it is to operate as a main contractor, it would operate better since the resources would have a unidirectional channelling. When the argument of taxes on the output of the company was to be considered, the company would still be considered as a main contractor. The profit levels although, not that much but they can sustain the operation of the company without incurring losses. When considering investment and profitability however this would not be a good investment as a main contractor. The financial status of the company should be separated when operating as a main contractor and when operating as a subcontractor. This would help in making a judgement that encompasses the general activities of the construction company. Subconstruction has been increasing on technology, scale and size of production. Being a construction company, where most and major construction work is done, the technological capability is an important factor. This would ensure that the client’s needs are met. This ensures that the company stays in the market amid stiff competition with other companies in the same market sector. The size and scale of the company would have been important information to be provided. The small sized companies are assumed not to have access to market advantages and bargaining power. In other words, large companies enjoy economies of scale and would operate more efficiently. If this company is big enough to pull economies of scale and operate under them then it would be right to justify the company to become a main constructor. The bidding capability, the management practices, payment procedures and project closeouts are important in the company’s operation as a main or subcontractor. The power that the contractor has in bargaining for contracts would sustain the company in the company in the company. Subcontractors are sometimes assumed to take care of risks that occur in their sections which at most times they are not responsible for. The main contractor should be able to take care of all the risks that would occur to the sub contractors. Supply to the company on credit or not The chairperson’s advertisement of the improvement of sales to an extent that would sustain the company for the next three years is a big relief. As much as the company has taxes reducing the profits by half is quite worrying. The profits could be increased by considering that the company receives supply of goods on credit. This supply is a mode of collecting capital from the company. The company would get working capital in circulation and would have an agreement with the supplier to pay within a specified period or would offer the supplier shares in the company. The lower margin between the liabilities and the assets would be widened if the company is to receive supply of goods on credit. Supply on credit will ensure that a contract is drawn between the two parties. This will protect the company against fluctuation of prices effect because the prices should e predetermined to minimize the ripple effects in the market. The delay in supply can get a solution because the time of supply will be pre-established to favour the activities of the company. With supply steady, the operations will proceed without interference, productivity will increase and so will productivity. When the prices of the supply are known and the output price is known, the company can easily plan for the future and carry out profit projection of the plan. This will also help the company to operate in the rational stage of production. The sales have already improved for this company; there is need for strategic planning to ensure that the sales profit the company. The fact that the sales have increased does not necessarily mean that the company cannot obtain losses. The sales may have increased compared to the previous sales, but the question is, do the sales cover for the cost of production and still provide a provision for profit? Are the profits enough to attract investors to allow the company to grow? Possible solutions to the problems being faced The situation at the company needs drastic measures just to ensure that the company does not become bankrupt. The company is operating both as a main contractor and as a subcontractor, it is necessary for the company to realise the section where the company has a higher comparative advantage of production this will have to be determined by all the factors of production within the company. A complete business plan need to be drawn, not only the financial statement which s a great effort. The effect of one transaction need to be analysed on the point of view of other activities that it affects. Highly profitable business plan need to be drawn, it should be noted that several profit plans may exist before the most profitable plan is reached. There is need for close and constant evaluation of the progress of the company’s financial status. The tools for financial evaluation should not just be carried out at the end of a financial period but also in between the financial periods before the end of a financial statement. This will help the company to keep close track on their operations that weigh the company down and can make drastic changes before adverse effects occur. Conclusion Other operations that affect the profitability of the company that need to be considered include, administrative practices, payment procedure, relationship between the main contractor and the sub contractor, project closeout etc. the already discussed issue of obtaining sales through credit would help the company to make a transition from slow operation to that place they want to be. As much as the company will be obtaining capital at a low cost it will also be provided with enough time to pay back the money either in cash or in terms of shares to the supplier. Bibliography Director, T. (2010, January 8th). Institute of Directors. Retrieved May 5th, 2012, from www.iod.com. Lock, D. (2010). The Management of Contracts and Subcontracts. New York : Routeledge Publishers. Management, T. (2009, January 23rd). Barclays Bank. Retrieved May 5th, 2012, from www.baeclays.co.uk. Management, T. I. (2010, February 12th). Chartered Institute of Management. Retrieved May 12th, 2012, from www.ciob.org.uk. Read More