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The impacts of the novel coronavirus have had, and will continue to have, a significant impact on the economy of the United States. Despite strong economic conditions in January and February, many aspects the U.S. economy ground to a near-complete halt in March due to government mandated “lockdowns” and “shelter in place” requirements. This led to a contraction of the U.S. economy deeper than anything seen since the 2008 financial crisis. And, by all accounts, it’s about to get a lot worse. The 4.8% decline in the first quarter U.S. economy is significant, but according to experts, the second quarter may see declines of up to 30% or more, as the full effects of the lockdowns make their way through the economy. 

According to Jerome Powell, chairman of the Federal Reserve, the country is “going to see economic data for the second quarter that is worse than any data we have seen for the economy" as a “direct consequence of the disease and measures we are taking to protect ourselves from it." This dire financial outlook, on top of the sudden and severe consequences already being felt by many, has resulted in unprecedented maneuvers in an attempt to provide support for the economy at large. So far, the Federal Reserve has pumped $2.3 trillion into the economy in the past six weeks, and the number is expected to grow to at least $5 trillion in aid by the end of the year. In addition, the federal government has approved more than $2 trillion in aid in an effort to provide some relief to individuals and businesses. 

However, despite this support from the federal government, many businesses are still suffering and will continue to suffer for some time. The construction industry is not immune to the downturn, despite some positive signals (such as generally being considered an “essential business” and a strong outlook for certain infrastructure projects). Residential construction in particular is expected to decline in 2020, as homebuilders and purchasers seek to delay any plans in the face of the ongoing economic uncertainty. In locations where construction has re-started, contractors are anticipating a lack of new jobs once currently ongoing projects are concluded. In fact, construction employment has declined in 99 metro areas due to the impacts of the COVID-19 pandemic

Make no mistake about it, a recession is coming. The depth and breadth of the downturn is up for debate, but the fact that industries throughout the world economy are in for a potentially rough ride is crystal clear. 

So, in the face of all that potential negativity, how can construction business protect themselves from financial risk and position themselves to survive and thrive in a recession economy? There are simple concrete steps that construction businesses can and must take in order to be best positioned to make it through what looks like tough times on the horizon.

Stress-test the business to get critical information

While it may seem obvious, cash is harder to come by in a recession economy. Despite this being obvious, however, many companies don’t have a firm grasp on how this limited access to cash will affect them. 

It’s important to get a baseline of the cash the business is using, the cash it needs for the next 6-12 months and how to reconcile the two. It can be assumed that business will slow down for most companies in a recession environment. Because of decreased revenues, there may be offsetting reductions in cost needed.

If there appears that there is still a gap between expected revenue and baseline expenses, after the belt has been tightened as much as possible, the business will need to look toward other mechanisms to provide access to the needed cash. If this is the case, it pays to take a hard look at the potential options (loans, credit cards, outstanding invoice factoring, etc.) to figure out which are worth pursuing. If it appears that a loan will be needed to keep the business afloat, don’t wait until the last minute to apply before credit tightens.  

Go after the right kind of work and only the right kind of work

All construction companies have a project type that fits the business best. These projects can be ones that have the most manageable scheduling requirements, generally pay the fastest, are of a certain time-frame or are a particular size. Narrow in on the target jobs and focus on only pursuing those jobs. While it seems like a company should jump at any opportunity for work when jobs are scarce, taking on work for which a company is not completely suited can be more of a problem than a benefit. Distractions and complications divert attention from doing more of the things a company does best, and it can be easy for a construction business to get “out over their skis” and sink deeper into trouble from taking on the wrong work.

Performing as a “specialist” in preferred job-types makes sure that a company can perform as efficiently as possible, and efficiency can be the difference between success and failure in a recession.   

Stay protected and use lien and bond claim rights

Performing work on credit in a recession economy can be a nerve-wracking experience. Not only are contractors waiting for payment—they have already incurred expenses. Not getting paid is a double blow. Luckily for construction companies, there are protections built into the law to make sure they don’t end up in that unfortunate circumstance.

Now that a recession is coming, it’s time to get strict about protecting lien rights. And there’s no excuse not to.

Whether a contractor gets paid, and when, is dependent on lots of things the contractor has no control over. In a recession there are more things than ever that can’t be controlled. Now more than ever it’s important to control the things to remain in a secured position and protect the company’s ability to recover payment if things go bad.

Pay specific attention to two things. The first is making complying with all notice requirements. Preliminary notices are generally required, and when they are, these notices are crucially important to protect the ability to get paid when problems arise on the project, even when those problems aren’t the contractor’s fault. 

In the coming recession contractors and subcontractors will encounter jobs where payments are delayed and will likely encounter other contractors who have significant cash stress and/or file bankruptcy. When these issues arise, send a preliminary notice. 

The second thing to pay attention to is the lien (or bond claim) itself. While no one wants to file liens against property or make claims against a project’s payment bond, a recession is no time to be a shrinking violet. When payment gets pinched, it’s time to pull the trigger. 

Construction attorneys agree that when payment is not forthcoming, escalate the matter and inform the stakeholders that the company’s rights are protected and it has the security to ensure payment. That is a powerful way to speed up payment. In normal circumstances, many are willing to give customers and other participants more time—but in a recession, where payment problems are going to kill business that don’t act to protect themselves, the time to act is “quickly.” A contractor’s own cash circumstances can put it out of business. 

Mechanics liens and bond claims have strict and tight deadlines. If action isn’t taken in the correct period of time, the protection from sending the preliminary notice is lost, and the company gets back in line with everybody else waiting for payment that may not come. 

Understanding the business’s cash needs, making the cuts for more efficiency, focusing on the best projects for the company and always protecting lien and bond claim rights can help contractors fend off the recession’s financial risk—and be positioned to thrive. 

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