How well do you know your customers and their creditworthiness? Have you really read your contract and understand all the terms and conditions?
When you hear the word creditor you likely think of banks and credit card companies. But your firm is a creditor too. Unless you are collecting payment before you perform the work, you are offering credit to your customer and you are a creditor. It’s imperative in volatile times to know how creditworthy they are. Do they pay on time? Have they stiffed other companies in the past? It is our experience that many construction firms skip this step and neglect to do the homework. If you aren’t doing this and have been lucky so far, it’s time to get a clear understanding of who you are working for going forward since COVID-19 has created more economic uncertainty than at any other time in this nation’s history.
The homework you seek can be provided by third party credit reporting vendors like Experian, Equifax, Innovis and more. These third-party credit reports will give you vital information about your client (also known as the debtor) including how many years they have been in business, are there any judgments or liens filed on them, average payment days beyond terms, bankruptcy history, and so much more. This is vital information when it comes to taking on a new project, no matter the size.
While you’re doing your homework, consider taking one extra step. Look further upstream and do a credit check on the project developer or owner. After all, they will ultimately decide who gets paid. This is especially true on larger projects where you will be providing more credit. Understanding the owner’s ability to pay, including the funding source, gives you an added confidence especially if the payment terms in your contract are “paid when paid” or even worse, “paid if paid.” These extended payment terms put your company at a much higher risk.
Any customer that has ever funded with CapitalPlus can request a credit check on their customer at no cost: that’s how important it is to your success.
Know and understand the implications of contract terms and conditions
A contract is a legal instrument that defines and governs the responsibility of two parties with respect to a certain scenario and defines the protections and actions allowed for each party. In the simplest form, a contract can be a proposal to a General Contractor (GC) or Owner whereby the buyer signs and returns the proposal to the offeror giving them permission to proceed. On most construction projects, the GC or owner will offer the contractor a contract to consider. These contracts are typically one-sided to the advantage of the offeror.
At CapitalPlus it no longer amazes us to learn that many contractors blindly sign their contracts without truly understanding it and often have not even fully read it. You might be better off doing a hand shake deal (although they may be enforceable) than not understanding the terms and conditions you have signed up for.
The pandemic is shaking up the construction space in many ways, increasing risk in an industry that was already fraught with it. Consider these two scenarios: project schedules are shifting due to interruptions in labor, and many construction projects are not considered essential leading to government-mandated shut downs. If you find yourself in one of these situations, you need to ask yourself a few questions.
Are you leaving a project and paying for rented equipment? If not, do you have the ability to bill for another mobilization? How does your supply chain look? Many have been interrupted or shut down due to temporarily closures, which means you may be getting your supplies from new sources, some cheaper and some more expensive. Does your contract allow you to cover the cost increase? More and more materials are now coming from foreign sources and those supply chains can be suspect at best. Government projects have been particularly impacted as government offices have been totally closed leading to slow or even no payment. If you are not being paid, does your contract allow you to put tools down and stop work or do you have a duty to proceed? What’s more, construction-related permits have been hard to come by in many communities. Does your contract allow you to get a no-cost modification to extend the schedule or will you have to pay liquidated damages for delays you were powerless to prevent?
These are just a few real-world risks facing contractors in our new normal. What can you do? First and foremost, review your contracts and understand your risks with these uncertainties in mind so that you have the potential to mitigate them when they occur. If you haven’t signed yet, be ready to discuss and negotiate these items with your client before you sign. Your goal: find mutual ground where both parties share in the risks and the contract is not overly one-sided. Finally, be willing to walk away from the negotiation table if the risk outweighs the reward.
While it’s true that none of us have seen a situation exactly like this, CapitalPlus has been funding construction clients for 20 years and has valuable experience to share. Many of our staff came out of the construction industry and understand the ups and downs of contract terms and conditions. Our clients benefit from free contract review and consulting. Because your successes are our successes.