News is coming in from all directions that the construction economy is picking up. The New York Times just ran a piece about the US Homebuilding market’s surprising positive trajectory, and this lines up nicely by a recent report that Lennar Homes is planning 140 new homes in Clark County and February 2013 saw the largest gain in construction jobs in over six years.
With all of this good news you may be curious about the fatalistic title to this article. What could I be talking about - save my business? in the recovery? The title is not a typo. Read on.
1) Understanding That The Rebounding Economy Could Be Financially Dangerous To Companies
The first thing that may save your business isn’t really a thing at all, it’s just knowledge: understanding the dangers of a rebounding economy.
A few months ago Thomas Schliefer, a professor at Del E. Webb School of Construction, published a viewpoints article on ENR.com titled: Beware The Recovery: What History Teaches Contractors and Sureties. The article’s tag line said it all: No one liked the recession, but some contractors and sureties are going to hate the recovery, too.”
The major point of Schliefer’s article was the “construction market recovery is going to be a financial struggle for most contractors because growth eats cash and many have been straining financially during th[e] unprecedented downturn.”
Schliefer’s points made an impression on me and inspired me to write an article about the recovery’s financial risks: Construction Market Growing Fast: Beware of Financial Risks.
Building upon the ENR piece, I noted that a rapidly recovering construction market also creates risk because government institutions are not ready for the increase in demand, laborers are in short supply, and accordingly, delay is unavoidable and scaling is a challenge.
It’s hard enough as it is to make money and survive in the construction industry. To survive the market recovery, it’s important that your business approach it with caution and carefulness.
2) Don’t Jump Into The Deep End Of New Business Without Strategic Credit And Collection Plans In Place
The first thing your company needs to do to survive the recovery is understand that the recovery carries risk, and the second thing your company needs is a strategic plan to handle the risk. Don’t just get infatuated with all the new construction activity and forget to have plans about how to handle that business.
On our blog dedicated to helping credit managers and executives strategize about getting paid - The Paid Blog - we talk about how running a successful business requires two primary efforts: (i) Acquiring enough business; and (ii) Not losing money / getting paid for the work you do. Our material focuses on the (ii) part of a business’ needs.
How do you ensure that you will get paid for the work you do or materials you furnish? By having a strong strategic credit and collections plan. Know exactly who you will do business with, how you bill them, how you’ll protect or secure your claims for payment, and how you’ll collect that payment if you’re unpaid.
This is simply known as a Credit Policy.
Make sure your company has a credit policy that makes sense for your cash flow and growth needs, and stick to it.
3) Secure Your Accounts By Preserving Your Mechanics Lien And Bond Claim Rights
The construction industry is blessed with mechanics lien rights.
Think about going to a bank and taking out a loan. The bank is going to check your credit and financials, but it’s highly unlikely that they give you a loan without requiring some collateral. For this reason, banks are very successful at collecting on delinquent accounts.
The construction industry has this very same opportunity with the mechanics lien remedy. Every time a contractor or supplier furnishes to a construction project, they are entitled to claim that construction job site as collateral in the event of a delinquent payer.
It is very smart to utilize these laws to protect and collateralize all of your accounts. If you do, your company could virtually eliminate the financial dangers of a non-paying account.
As the construction economy rebounds, prepare for the worse and hope for the best. There’s no better protection for your construction or material supply company than to preserve your lien rights.