By Stan Bachman
Morefield Speicher Bachman, LC
Cash flow is king in construction and getting paid is perhaps the most important variable whether a business strives or survives. Getting paid in the construction business has unique challenges. What is the best way to get paid? What do you do if payments are delayed?
Or worse case, what do you do if you don’t get paid at all?
There are logical reasons why it’s particularly difficult to manage a construction company’s the cash flow:
- Projects are cash intense and have long timelines going on for months and years.
- Retainage is commonly 10% and is withheld for extended periods of time; retainage is often equal to or more than the contractor’s margins for overhead and profit.
- Construction projects are complex, risks are high and compounded by uncertainties like weather, labor and material shortages and labor and material cost increases.
- Clients are often highly leveraged with extremely tight budgets that don’t account for contingencies during the construction of the project, often resulting in disputes over payment.
- Margins are thin, and quickly evaporate when things go wrong.
- Cash flows downhill…if the Owner is slow pay, the general contractor is slow pay, etc.
- Final payments can get bogged down and often unfair amounts are withheld to ensure the work is completed to everyone’s satisfaction.
Here are a few tips to help ensure you are in as strong a position possible to get paid:
Credit Worthiness Due Diligence
Before doing any work on credit, get a credit application or credit agreement. Inquire with the Secretary of State’s website confirming that a customer is a legal entity as presented on the credit application. Check to see if their licenses are current. Ensure all business names match up as legal entities. If they don’t, it could be more difficult to enforce contracts, liens and bond rights.
Setup A Guarantor of Account
If your customer doesn’t have enough cash or assets to pay a debt, then you shouldn’t be signing up to do the project; however, if the business is cash poor, perhaps the owner’s of the company you’re contracting with has financial resources to pay the bills. Don’t expect to negotiate this after a contract is signed. Address financing of construction payments in advance. When possible, get personal guarantees of payment and run credit checks on the company. Bottom line…know where the money’s coming from to fund the project.
Keep A Regular Audit Process
Audit customers and suppliers even after a project has started. Be on the lookout for any changes to names of legal entities. A name change is a red flag that needs investigated as to why. Any change in credit standing signals the need to reconsider credit terms.
Exercise Lien and Bond Rights
If you encounter payment problems, don’t forfeit or waive your liens and bond claims. Know the timelines, deadlines and notice requirements. There are differences in public and private projects, and differences from state to state. Contact us before you start sending notices. We’ll provide important insights based on your specific project requirements.
Include Project Name On All Documents
Be sure to include the name of the project on invoices, purchase orders and even delivery tickets. This will make it much easier to substantiate lien or bond rights. It confirms what’s owed to your firm for that specific project and it helps with lien deadlines. Require all suppliers include the name of the project on invoices and delivery tickets.
By taking simple steps such as these before, during and after a project, you will increase the odds that you will get paid for the services or equipment that you provided. Because, make no mistake, these steps can mean the difference between a business that’s profitable and thriving, or one that’s facing a highly uncertain future.
Start With the End in Mind
From day one, document, document, document. When a financial problem occurs due to non-payment, and the need arises to file a lien or bond claim, then is NOT the time to create the documentation. Put policies and procedures in place that keep all documents that will be required for a lien or bond claim current, and keep them current. When a claim is needed, at a minimum you’ll need to be able to prove, with documentation, the “who, what, when, where and how” of the work you performed.
About Stan Bachman
I was a general contractor and business owner for 25 years before becoming a lawyer. That background lends me insight on how to provide legal representation and services for my clients and companies in the construction industry. I have an understanding of what it means to be in, and walk in your shoes. If you’re currently dealing with a construction payment issue, need help with payment terms in a contract you’re considering, or any other business and construction law need, I’d be happy to assist.