How Contractors Can Re-Underwrite Themselves
Contractors should stress test everything about their companies.
In the mid-2000s, Jamie Dimon took over a bank whose internal models looked fine on paper. The market was ripping, liquidity was abundant, and growth masked fragility. But when he started digging into the loan book, he saw that Bank One, the sixth-largest bank at the time, carried more corporate credit exposure than Citibank, the largest bank at the time. It didn’t make sense - and he came from Citibank! The spreadsheets said the risk was manageable due to aggressive accounting, but intuition said otherwise. So Dimon asked a simple question that few folks in the ENR top 400 are asking: what if we’re wrong? And if we are, to what degree and are we prepared?
That line of questioning led Dimon to charge his company to run a full re-underwriting of their entire loan portfolio. Every loan, every assumption, every counterparty as if the recession, or a black swan event, had already arrived. They starting become significantly more conservative in their operations and became disciplined on how they would husband cash and which loans they would originate. And that discipline let them play offense while everyone else was still scrambling to read the scoreboard, when the downturn happened.
For many top ENR 100 contractors, it’s much like 2006 again. It’s go-go time, but there’s still some structural cracks in the market. I believe many construction companies need to start doing something similar and start stress testing all aspects of their business. It’s been almost 20 years since that time and while history doesn’t always repeat itself, it certainly does rhyme.
I believe the next era of great construction companies’ dominance will belong to firms that treat their backlog not as a pipeline of guaranteed work, but as a portfolio of risk-weighted exposures. This is a radically different approach to backlog management as many contractors still manage their businesses as if backlog alone equals safety in that the larger it is, the better they’re doing and therefore, how well positioned they’ll be in the future. In reality, backlog can quickly turn from an asset into a liability if it’s not stress-tested. Because backlog is not cash. It’s obligation. It’s promises made to employees and clients, backed by assumptions about subs, suppliers, and credit conditions that may no longer hold in the future.
Many contractors, even the largest ones, are fundamentally over-indexed to momentum. They assume the system keeps working and that current conditions won’t materially deteriorate. They assume the supply chain keeps delivering. They assume their subs can float another month. They assume their clients’ funding will always be there. Untested assumptions can masquerade as confidence in backlog strength. But by definition, they’re untested and therefore, there’s latent and implicit risk that’s not priced into the business.
Executives often defend the current model by pointing to the cost-plus structure of the industry. It’s the most common counterargument I hear: “Our exposure is limited. We’re a service business. The owner pays for the work and so we have limited risk.” That’s true at the project level as the cost is reimbursed, the fee is baked into the contracted GMP and protected, and in theory the risk is capped. But that logic falls apart once you zoom out. At the enterprise level, risk compounds across multiple projects, multiple regions, multiple markets, etc. The contractor’s health is tied to the liquidity and coordination of a thousand counterparties. The business model that protects the margin of an individual job, doesn’t protect the system that enables those jobs to run.
Look at tariffs. A sudden 15 percent tariff on goods coming from Asia doesn’t hit the general contractor’s P&L directly but they certainly affects the supplier who locked in pricing months ago and can’t pass the cost through. That supplier’s margin evaporates overnight. They slow shipments, delay deliveries, and begin triaging which clients to serve based on who pays faster or has more favorable payment terms. The mechanical subcontractor who depends on that supplier suddenly has idle crews and begins experiencing rising bench costs through idle labor. Their working capital starts diminishing next. The GC, meanwhile, feels insulated until the delay becomes schedule exposure and the owner starts escalating. One shock, three layers of liquidity compression, all stemming from a macro event no one modeled because “our contract is cost-plus with a GMP.”
The same dynamic plays out with supply chain turbulence. When lead times stretch and delivery dates slip, subcontractors can’t put work into place. They can’t bill. They can’t collect. Their bench costs balloon. Their AR grows faster than their cash flow. They draw on credit lines, raise prices, or start walking away from certain bids because they can’t afford to take on more work due to disjointed cash conversion cycles.
The GC’s balance sheet may not show the strain yet, but the operational system underneath it is becoming brittle. If a few key suppliers or trades fail, that backlog you’ve been bragging about suddenly converts from “secured work” to “unperformable work” which becomes a liability.
Interest rates create the same fragility on the client side. Capital budgets that looked solid at five percent debt now make no sense at eight. Projects delay, public agencies rescope, and corporate owners quietly shelve projects. The jobs stay in the contractors CRM system, potentially even as backlog for a while, but they’re ghost projects. They’ll never break ground. And yet someone was already slated to be staffed for that project and they’re already on the bench. By the time you realize half your pipeline is frozen, it’s too late to right-size.
These are not theoretical risks. They’re inherent to the industry and structural in nature. They’re embedded in how the industry shifts exposure downstream. Large contractors write subcontracts that push risk onto trade partners. Those entities push it further down to suppliers. Each tier assumes the next one will absorb the shock. But shocks don’t disappear. They accumulate at the weakest link until the link breaks. And it’s not clear to me that these types of conversations are taking place at the leadership level of many firms.
The truth is that construction is one of the few industries that rarely re-underwrites itself. Banks do it. Insurance carriers do it. Private equity firms do it. They routinely stress-test their portfolios (read: backlog) against new market conditions, interest-rate environments, and liquidity constraints. Contractors don’t. They equate booked backlog with durability. They assume the past is prologue.
That’s a mistake.
A contractor’s risk map should look less like an Excel CRM and more like a credit portfolio. Every project should carry an exposure weight: how dependent is it on rate-sensitive funding? How many single-source suppliers does it rely on? How much float exists in the sub-tier cash cycles? How long can each partner operate if payments slow by thirty days? When you start looking at your backlog through that lens, you realize how little you actually control and therefore how much you’re actually exposed to. And to be clear, this is not prequal(ification) - that’s a separate function and separate topic.
The most forward-thinking contractors I know are beginning to adopt their own internal stress-testing capabilities. They run their operations through a few core questions:
What happens if a project gets delayed for three months?
What if a top supplier fails mid-project?
What if tariffs or shipping disruptions increase input costs by 20 percent?
What if the federal funding cycle pauses or shifts?
Run those questions across every market vertical within the industry from hyperscale data centers, public infrastructure, industrial manufacturing and you get very different exposure profiles. Hyperscale is capital-intensive and client-concentrated: low margin for error, high dependency on a few tech giants contrasted with the fact that those project owners are willing to pay almost anything to get a project completed - so it’s appealing. Public infrastructure is typically politically funded: with exposure to election cycles and budget appropriations and they pay slowly compared to private dollars. Industrial manufacturing sits somewhere in between, tied to both capital costs and supply-chain integrity. The point isn’t to eliminate risk; it’s to make it visible and make informed decisions on how much value you’re capturing for the risk you’re taking on.
Once you see run through the exercise and surface risk exposure clearly, you can act on it. You can diversify counterparties. You can pre-buy materials and equipment in volatile categories. You can get creative on payment terms with trade partners who are over-levered. You can build redundancy into your supply chain by owning direct relationships with equipment OEMS rather than assuming subcontractor + supplier reliability. You can adjust your project mix for balance-sheet durability and not just revenue growth.
The most sophisticated contractors will go further. They’ll start treating subcontractor and supplier data the way banks treat loan input data. They’ll build counterparty risk indices that track financial health, payment trends, and project performance across the ecosystem. They’ll evaluate concentration risk in their value chain and identify the few firms whose failure would cascade through their backlog and they’ll actively manage it. In time, this kind of insight will separate the disciplined operators from the exposed ones.
Because what’s coming next is not a smooth reversion to normal. It’s very much a K-shaped economy where some verticals such energy, mission-critical, advanced manufacturing continue booming while others stall. The surface-level growth in backlog will conceal widening cracks underneath, especially in market (geo or vertical) concentration risk. Many subcontractors are already absorbing more volatility than their margins are built to sustain. They’re financing projects for owners and GCs through slowly paid or unpaid receivables. They’re often one macro shock away from distress. The larger players, meanwhile, are pushing more responsibility onto them. It’s a slow squeeze and a terrible margin compression dynamic. Eventually the system runs out of elasticity.
My question for every executive is whether you’ll see that before it hits your books.
If I were advising a major contractor, I’d start by re-underwriting the entire enterprise. Not just projects, but clients, subs, suppliers, and markets. I’d assign every exposure a health score based on liquidity, optionality, dependency, volatility, etc. I’d have my CFO model what happens if 10 percent of counterparties go insolvent. I’d want to know which projects die first in a liquidity freeze. I’d want to know which suppliers can’t survive another tariff shock. I’d want to know where my next crisis originates before it manifests in change orders and defaults. I’d push to have more direct relationships with suppliers and equipment OEMs to control more of my destiny.
From there, I’d build a recomposition playbook. The actions I’d advise the contractor take when stress scenarios trigger. That might mean increasing self-perform capabilities in the near-term and then shifting scope to self-perform teams in the medium term. Could also include renegotiating material sourcing, or accelerating cash to key partners to preserve performance capacity. It might mean building supplier cooperatives for critical categories like switchgear or mechanical equipment, pooling demand to gain leverage and resilience. It might mean pre-funding long-lead items during stable periods to hedge against geopolitical volatility. It could look like increasing warehousing footprints to guarantee material supply. The specifics vary, but the mindset is consistent: act like a financial underwriter.
This is what Dimon’s questions looks like in construction. Not mystical foresight as to if an event will happen, just disciplined preparation for when. Construction needs its own applied doctrine to rethink how we approach risk in the industry. Again, not in the accounting sense, but in the operational one. The discipline to ask: what if we’re wrong? What if the assumptions underpinning our backlog no longer hold? What if the ecosystem we rely on is weaker than we think?
Nevertheless, most firms won’t do this. They’ll continue measuring future strength by how full their pipeline is, not how resilient it is. They’ll mistake volume for durability. And when the next squeeze comes through some macro event and liquidity tightens, when clients delay, when supply shocks ripple through the chain, they’ll find themselves asset-rich, cash-poor, and operationally brittle.
The firms that win the next cycle will be the ones who treated operational and backlog stress testing as a core competency throughout their organizations and not just not a board exercise, but a management rhythm. The ones who mapped their exposures, built contingency muscle, and re-underwrote their business before the downturn arrived.
If your CFO can’t tell you which 20 percent of your backlog dies first in a liquidity freeze, you don’t own your exposure. It owns you.
For the executives reading this who want to build the discipline, there’s never been a better time to stress test your organization. There’s a way to turn this doctrine into practice. A framework for quantifying exposure, instrumenting counterparties, and building an internal stress-testing model that actually reflects how the industry works. But make no mistake, this requires a painful change management process that will burn through a lot of organization political willpower.
The firms that build this muscle now will be the ones dictating the pace later. Great defense wins championships.