By Patrick Hogan, CEO, Handle.com
As one of the pillars of the economy, the construction industry is largely affected by economic upswings and downturns. The state of the economy affects the decision-making of families, companies, and investors when it comes to investing in real estate. These patterns then dictate the level of demand that contractors and suppliers see. A strong economy means more disposable income for consumers to spend and a boost to entrepreneurship for aspiring business owners. On the other hand, a weak economy translates to more conservative spending, and entrepreneurs are discouraged from starting new businesses.
Now that the world is currently experiencing the COVID-19 pandemic, how will construction contractors fare in the face of another global recession on top of the industry’s existing payment issues?
How COVID-19 Is Affecting the Construction Sector
Like all industries, the construction sector is not immune to the COVID-19 crisis. Many of the steps enacted by the federal and state governments, especially the widespread shutdowns to slow down the coronavirus, have a negative impact on construction operations. Before the coronavirus became a full-fledged pandemic, the construction industry was already reeling from a 1.3% drop in construction spending in February. Economists are forecasting further declines as stay-at-home lockdown measures are in place.
Whether construction projects move forward or not depends on whether local governments consider construction “essential.” Several states generally allow construction activities only if they are related to other essential products and services, especially if they are needed for COVID-19 relief efforts. For construction projects that do proceed, project owners, managers, and contractors need to prepare for several challenges ahead.
The current pandemic will see longer completion times for projects, largely due to disruptions to supply chain and capital markets as well as reduced labor availability. The lockdowns of states and communities to curtail the pandemic also slows down the flow of materials from manufacturers and warehouses to construction sites. Social distancing and quarantines on a mass scale affect personnel availability and productivity. On big projects typically done by groups of people, construction workers need to find ways to distance themselves from one another while managers need to enact measures that ensure proper health and safety protocols to combat the coronavirus are in place. Workers who are sick or have concerns about being sick need to stay at home. Community lockdowns also limit the movement of people to just the essentials.
How to Protect Payments During the Pandemic
The current coronavirus crisis, as well as the supply chain issues and economic uncertainty that come with it, will inevitably cause payment disputes. On a typical construction project which follows a hierarchical system of payments, the challenges echo down the ladder, with the contractors and suppliers at the bottom of the chain feeling most of the pressure. These disruptions, delays, and disputes are expensive, especially for small contractors, and can mean the difference between sinking and keeping the business afloat.
As the pandemic goes underway, it is time to review your contracts. In contracts, there are force majeure clauses that either defer or release parties from the obligations stipulated due to circumstances that are beyond the control of the breaching party. While these provisions are easily overlooked in ordinary situations, the current economic uncertainty due to the COVID-19 crisis highlights their significance. Depending on the language of a contract, you may be entitled to more time to complete the job or even void the contract altogether. Consult a construction attorney and learn more about your rights.
It also helps to talk to the other parties of the contract and simply create a new agreement. The circumstances brought by the pandemic are unprecedented, and a compelling reason to get ahead of potential work and payment disputes, and agree on reasonable provisions.
Finally, it is important now more than ever to protect your right to file a lien. The mechanics lien has always been the tool that helps contractors and suppliers seek recompense for unpaid work, even before the COVID-19 crisis. But with the effects of the pandemic felt by all construction businesses, contractors need to be doubly strict in complying with the requirements of mechanics liens.
Always send preliminary notices for every job that you take, to ensure that your lien rights are well-protected. If before you were a bit lax in contacting clients for payments, you should now be strict with deadlines and readily send notices of intent to lien in case they need a little push. If you fully complied with the requirements, you will be able to file a mechanics lien to compel payment.
As the COVID-19 crisis is still growing, the extent of its effect on the construction industry is currently unknown. Like the great recession of 2008, it will surely have lasting consequences not just for the industry but for the global economy. While this is indeed a huge challenge for construction businesses, you should know that there are ways to protect your payments and ensure the survival of your business.
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.
