By Patrick Hogan, CEO, Handle.com
Four months after the first recorded case of COVID-19 in the United States, the situation is still largely the same for contractors in the country. Governors are beginning to ease restrictions in the construction industry to get people back to work and restart the economy. However, construction businesses are still subject to the same supply chain disruptions, cash flow problems, workforce shortages, and health risks in continuing business operations.
The focus of construction businesses now is to protect employees from health risks, manage the operational impact of supply chain disruptions, and preserve revenue sources as much as possible. Revenue protection, in particular, is the biggest challenge for construction business owners.
Payment issues have always been present in the construction industry, even before COVID-19. Construction delays and payment disputes are such a frequent occurrence in the industry that some may even say they are the norm rather than the exception.
These issues can be traced back to how the industry operates. A single construction project, for example, can have multiple contracts signed by multiple stakeholders. These contracts follow a hierarchical framework where payment accountabilities start from the property owner or the general contractor down to the subcontractors, sub-subcontractors, suppliers, and so on. This can cause communication issues between stakeholders, delays in schedules leading to further delays of payment, and a “domino effect” of nonpayment from the top parties down to the other participants in the contracting chain.
Now that the COVID-19 crisis has struck and all of these payment issues are amplified, construction business owners need to be proactive in protecting cash flow sources. Here are some of the ways you can protect your revenue in the time of COVID-19.
1. Analyze your current financial standing
One of the first things that you need to do is take a step back and look at the current state of your finances. Consider how much cash you have in your reserves and assess how long it will take before fixed and variable expenses take over your cash cushion. Many of the steps that you need to take to handle the COVID-19 crisis will involve a lot of cash so it pays to know how much cash you need to survive the ordeal and how long your reserves will last.
With cash flow getting tighter over the coming months, you may have to reconsider any capital investment plans you had before the crisis. In addition, you should look out for financing options that are available to you in case of cash emergencies.
2. Preserve your right to file a mechanics lien
The mechanics lien is a powerful legal tool available to contractors and suppliers that allows them to receive compensation for unpaid services provided or materials furnished. If before the COVID-19 crisis you weren’t as proactive in protecting your right to file a mechanics lien, this time you need to be strict. After all, you need to take advantage of the tools in your arsenal to help support your business needs.
The most crucial step in preserving your lien rights is filing a preliminary notice. This is a legal document that contractors and suppliers serve on the project owner and relevant stakeholders to announce their participation in the project and reserve their right to file a lien in case they don’t get paid. Different states have different rules and deadlines in filing this notice so ensure that you send your notices on time. For example, a California preliminary notice is required to be delivered–otherwise, you lose your right to file mechanics liens in the event of payment issues.
When you don’t get paid for your materials and services, don’t hesitate to file a mechanics lien. In normal circumstances, you may afford to cut your clients some slack and give customers more time to pay you. But in the current crisis, cash problems can put you out of business. Filing a mechanics lien is one of the best ways to keep your cash reserves full.
3. Ensure a tight construction contract
The construction industry is founded on contracts. The construction contract is the primary tool that defines the relationship between the project owner and their general contractor, subcontractors, suppliers, and so on. In addition, it allocates project risk to those well-suited to handle them and provides the mechanism to mitigate these risks.
As the COVID-19 crisis continues, it is crucial that you be diligent in ensuring your construction contract is well-crafted. It should be written in a clear and concise language to avoid any dispute that can affect payment. It should also define the scope of work and anticipates the problems that may arise throughout the project and how to solve them. More importantly, it should address the realities of the current crisis—supply chain disruptions, workforce issues, health risks, and so on—and adjust the scope and work deadlines accordingly.
As the pandemic is reaching its peak, it is important now more than ever to keep your eye on the ball. Your company needs to be prepared to handle the cash flow impact of the crisis and you can only do so by protecting your revenue sources.
About the Author:
Patrick Hogan is the CEO of Handle.com, where they build software that helps contractors, subcontractors, and material suppliers with late payments. Handle.com also provides funding for construction businesses in the form of invoice factoring, material supply trade credit, and mechanics lien purchasing.
