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Last year felt like a lose-lose situation, shutting down projects and crushing the cash flow of construction businesses across the country. Many that survived emerged desperate to take any job they could find. Any business practices that might add another obstacle to the sale are unlikely to get a second look. But sales are meaningless if a business can’t collect on the debt after the job is done.

With increased economic uncertainty, a rise in bankruptcies and continuing COVID-19 regulations, these four habits will help construction businesses protect their bottom line in 2021 and beyond.

1. Prequalify potential customers and projects

Nearly every material supplier and equipment rental company in the country uses a credit application to assess the companies that walk through their door. If they see red flags on their credit report, get poor feedback from trade references or spot inconsistencies on financial statements, they may decide not to extend a credit line at all.

Contractors are often much less picky. Most don’t use credit applications, relying instead on a contract or their lien rights to provide legal payment protection. Of course, legal remedies exist to help construction businesses recover payment. But they are tools of last resort. The best business decisions are made before a project is accepted.

Does that potential customer pay its vendors on time, or do they have a string of lien claims trailing behind them on past projects? Do previous subcontractors complain about their communication and coordination on previous jobs? At the very least, a thorough credit investigation will yield information that helps the business take steps to reduce financial risk.

2. Negotiate the contract

Often, contractors don’t feel comfortable asking for changes to a contract, especially when the hiring party responds, “It’s standard—everyone signs it.” A judge will not be sympathetic to a claim if the only defense is “everyone else signed it, too.” A contract is an agreement, and until both parties have put their signature on the dotted line, there is no agreement. Every contract is open for negotiation.

A good construction agreement is balanced, meaning the risk is shared equitably between the two parties. COVID-19 has renewed interest in certain contract provisions, including force majeure (Acts of God), delay compensation and price escalation.

David Blake, a partner with Seyfarth Shaw LLP, advises contractors to be specific with escalation clauses during a pandemic. “For example,” David says, “the cost [increase] must: (i) be solely attributable to an Unknown COVID-19 Condition; (ii) be reasonable under the circumstances; (iii) not be the result of the contractor’s failure to comply with the contract documents or a COVID-19 Proclamation; and (iv) not be the result of a subcontractors’ or suppliers’ failure to comply with a COVID-19 Proclamation while onsite.”

A construction lawyer can help businesses come up with a list of contract provisions and terms that work for them—and those that don’t. Of course, some popular contract clauses shouldn’t pass muster in any year, pandemic or not. Pay-if-paid and pay-when-paid clauses are a favorite of many general contractors, but their legality is disputable. A subcontractor has an agreement with the party that hired them, not the property owner. Most subcontractors never even meet the owner—why should they be bound by terms set by someone they never agreed to do business with?

3. Collect job information in advance

Construction has historically been an industry of handshake deals between parties who knew and trusted each other. Today, it’s rare that a contractor knows anyone on the job. The longer the job goes on, the harder it becomes to get critical information. The name and address of the property owner, the surety company bonding the project, and even the address of the project itself are necessary for sending a notice, filing a valid lien, or making a bond claim.

By the time a dispute arises, contractors are much less forthcoming with information. They aren’t eager to provide details that arm the other party’s legal team.

However, collecting job information is not simply about protecting business interests in the event of a dispute. Contact information for the property owner, lender, surety, and other project stakeholders can help improve communication, prevent delays and resolve issues before they become disputes.

Collecting job information at the start of the job, when relationships are still intact, is a low-risk exercise with far-reaching benefits.

4. Use notices and conditional waivers liberally

 Winning all of the construction business in the world is irrelevant if invoices simply turn into accounts receivable. Getting paid may be some of the hardest work that a construction company will ever do, largely due to the fact that they weren’t built to do it. A contractor doesn’t get into business to be a collections agency. The amount of paperwork and legal jargon can feel like a burden.

Fortunately, there are two simple, common documents that can have an outsized impact in their ability to speed up contractor payments: the preliminary notice and the conditional lien waiver.

If there were a single document that a construction business could send to dramatically increase their likelihood of on-time payment, it’s the preliminary notice. In many states, sending a prelim is a prerequisite for retaining lien rights. But its real power lies in the document’s ability to improve communication on a project. Sending notice to the owner, lender, general contractor, and any other party in charge of payments alerts them to the subcontractor’s presence on the project. When it’s time to cut checks, those who sent notices are first on the list.

A conditional lien waiver works in a similar fashion. Delivering a conditional waiver along with a payment application helps to open lines of communication and build a stronger relationship with those holding the purse strings. Because a conditional waiver only effectively gives up lien rights after the payment is finalized, it carries virtually no risk. As long as the requested payment is made according to the contract terms, it’s a win-win for both parties.

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