By Patrick Hogan, handle.com
The level of financial risk that construction businesses deal with is no joke. For every project, there’s always the possibility that you won’t net a profit or the payments get so delayed that other projects–and ultimately, your bottom line–are negatively affected. This is why more and more construction businesses put immense value on risk management, beefing up the capacity and capability of their finance personnel and dedicated credit teams to ensure that the business profits from its work satisfying customers.
But managing financial risk in construction is no easy feat. There are many moving parts, and there’s no single way to ensure that risk is mitigated. Too conservative, and you lose out on projects. Too loose, and you lose out on payments. But, there are best practices that cover a wide range of risks that every prudent business owner in construction must ensure are in place in their companies. Here are some of them.
Cover all bases when invoicing and sending pay apps
Construction businesses take pride in the quality of their output, be it the skilled work and labor their teams provide or the final result of end-to-end projects. These works are made possible by sticking to processes that are tried at true. There is no reason why the same approach–creating and polishing processes to refine results continuously–is not applied to reducing financial risk and getting paid on time for projects.
The basics of ensuring that you’re staying profitable and reducing the risk of carrying a significant number of unpaid receivables include regular invoicing, ensuring that pay apps are correct and detailed, and offering various payment methods aligned with your client’s preferences.
Protect your right to file liens
Lien laws were created to protect contractors and other construction professionals from the financial risks of running construction businesses. Yet, many companies still don’t secure their lien rights for every job. Every enterprise-level construction business knows this is a must, and competent contractors and suppliers working in construction must do the same. Lien laws for many states also include provisions for lien waivers that forge stronger relationships with clients–once a progress bill or final bill is paid, you relinquish your right to lien.
These risk-mitigating tools are available for contractors and suppliers, yet some still don’t use them. Indeed, it’s not simple–ensuring that the appropriate pre-lien notices are filed for every job can be cumbersome and complicated, especially for businesses working on projects in different states. Using lien filing software that ensures that all notices are accurate and sent according to the time and manner required by state laws is crucial in ensuring that you retain the right to file liens if payment issues arise.
Be shrewd about credit applications and monitoring
Ensuring that clients have filled out their credit applications with complete and accurate information is a must. Yet, many companies get into the habit of treating credit apps just as a formality. The information on the forms included in credit applications must be used in conjunction with your prospect and customer research to ensure that you’re extending the appropriate credit terms to customers. Overextending credit is one of the chief ways construction businesses put themselves at greater financial risk.
To further strengthen your risk management approach, monitoring their credit situation as the months and years pass must be part of your protocol. Financial conditions can change quickly, and when a customer has access to credit they can’t afford, all the risk is shifted to you. Having a process that schedules regular checks and using technology that automatically alerts you in case of publicly reported irregularities is a good practice.
Strictly vet prospects
Sometimes there is a disconnect between the sales and credit teams when onboarding new clients. Sales teams feel restricted by strict credit rules, while credit departments feel compromised by the hasty intake of clients who might be deemed risky.
Working together by sharing vital information throughout the vetting process benefits both departments. The sales team benefits through deals not falling through last minute or not getting their commissions because the client has payment issues. The credit team has an easier time dealing with invoices with clients that pay and pay on time.
Examine all contracts
The reality is that the amount of risk you take on is decided at the very beginning of the project–through the contract. In terms of risk, the clauses and fine print determine who gets what. Because construction projects are complex and commonly involve many subcontractors and suppliers, some lower-tiered subs can sometimes get the shorter end of the stick. They must carefully inspect the provisions of their contracts, especially those related to payments.
Running a business in construction could be high-risk financially, but there are ways to mitigate this without alienating your clientele or being too conservative. Apply these strategies and see how it affects your business’s longevity and financial health.
About the Author:
Patrick Hogan is the CEO of Handle.com, where they build software that helps contractors and material suppliers with lien management and payment compliance. The biggest names in construction use Handle on a daily basis to save time and money while improving efficiency.
