How Construction Creditors Can Stay Protected Amid Labor Shortages
Regardless of the type of project, payments are always just around the corner in the construction industry and often driven by project deadlines. According to recent reports from Dodge Data & Analytics, construction's struggles to maintain a solid labor force have created an increase in project delays, possibly marking the beginning of a domino effect that could soon topple over into credit departments.
In the USG Corporation and U.S. Chamber of Commerce's quarterly Commercial Construction Index, the survey concluded 70% of the more than 200 contractors surveyed were "challenged to meet schedule requirements" in the first quarter of 2019—a 4% increase over 2018's first quarter. Contractors attributed this challenge to labor shortages among other concerns, including the number of skilled workers as well as asking those workers to pick up the slack. Such sentiments reinforced concerns that the number of skilled workers will decrease in the next six months.
"[My single-most-important concern about my business in the next 12 months is] being able to bid jobs competitively and still turn a profit while paying much higher labor costs," one survey respondent stated. The lack of sufficient labor also increased project costs for 63% of contractors, with 40% actually turning down offers. Project delays are ongoing.
So, what can construction credit managers do if they're financing a project that gets delayed? NACM member Matt Abbate said they ought not fret because there are tools in place to ensure credit professionals still receive payment on time. Abbate, the manager of credit and collections at Construction Specialties in Muncy, Pennsylvania, said the company conducts business both domestically and internationally, so he has learned to try to address any payment concerns as soon as the company receives an order. Beyond conducting a credit investigation and/or pursuing cash in advance or a letter of credit, Construction Specialties also researches its lien filing rights in the state where it's conducting business.
"We consider filing for every job over $25,000 depending on the state," Abbate said. "We always protect ourselves that way because in a state that's a notice state, if you don't do that, then you lose your lien rights down the road and you can't file a lien on the project. Staying on top of the lien rights is really important because that's an eye-opener."
Owners don't want liens on their properties because liens can create problems if and when the owner wants to sell, Abbate explained, describing liens as "a cloud on the title." If necessary, Abbate said, he will first inform the customer Construction Specialties has filed a notice on the property and that the customer has a set number of days to pay. Otherwise, Construction Specialties will move to file a lien. In response, owners often reach out to the general contractor (GC) who may contact the subcontractor (sub) to jumpstart the payment process. Abbate may also seek a personal guarantee from the owner to ensure they make payment or request a joint check agreement.
"We use a lot of joint check agreements. We might get a purchase order for $70,000 from a minority contractor who hasn't been in business that long," Abbate noted. "Financially, we'll reach out to the GC and get a joint check agreement signed by me, the contractor and the GC. We get the GC to get the subcontractor to sign the check and then the GC mails it directly to us. That covers us too. We use every instrument allowed by law to make sure we get paid on time."
—Andrew Michaels, editorial associate