Minimizing Extreme Weather Impacts in Construction Credit

The construction industry is directly impacted by weather conditions—heavy rain, snowstorms and dangerous heat temperatures can cause issues such as improper concrete curing and foundation pouring, for example. These can lead to prolonged delays resulting in project timeline disruptions, increased costs and ultimately impact the ability for creditors to get paid. Extreme weather events are only expected to become more common, and the construction industry is faced with finding creative strategies to adapt.

Extreme weather conditions can make construction materials harder to purchase, delay material deliveries and even block off job sites. Frequent natural disasters due to climate change including wildfires, floods and the most recent countrywide winter freeze can also contribute to significant economic loss.

But even through natural disasters, credit managers must find risk management solutions. Here are a few ways to minimize risk and maximize opportunity:

Update and check your contractual language. Contract language is key for liquidated damages, said Chris Ring of NACM's Secured Transaction Services. "Extreme weather may cause a delay in the project, so you have to check to see if your contract has some sort of contractual leeway when dealing with weather," Ring explained. "You should also check for any contingencies built into the contract. If there aren't any, liquidated damages should be assessed for a delay in the project being fulfilled."

This also ties into incorporation by reference and flow down obligations. If credit managers accept a purchase order or subcontract with provisions for liquidated damages for a delay in the completion of a project but there is no concession for weather, liquidated damages can flow down to the credit department.

Sherry Raposo, corporate credit manager at VSS Emultech (West Sacramento, CA) said her company was busy with a lot of emergency work due to the Caltrans fire disaster. "We had to carefully watch our receivables for all our companies because we could have three of our companies working on the same project," Raposo said. "We also worked with our customers who were doing emergency work and extended their terms since it takes a bit longer to be paid on emergency work."

Monitor temperature regulations for materials. In many areas across the U.S., there have been much colder temperatures and lots of snow—and material suppliers are especially impacted by these weather circumstances. Before you ship your product out to your customer, it is imperative to keep the materials at the correct temperature for them to function properly when installed. (The fresh concrete temperature limit is maintained between 50 and 90 degrees Fahrenheit to ensure optimal curing.) If you cannot use the product due to improper care, the weight falls back to the material supplier.

Use storing to your advantage. Site storage provides the necessary space for the protection of materials and products needed to be given to construction workers. But if inclement weather causes a delay and someone needs the storage space, some issues can arise. For example, if there is a $10,000 order that cannot be shipped to the original job site but the customer wants the order shipped to a third-party warehouse. "You'll still have to prove those materials were shipped to one location but are being installed at another location," said Ring. "This can cause complications with being able to prove that your materials actually arrived at the jobsite—but there are written documents you can obtain to show proof."

Choosing not to use written documents doesn't eliminate your lien rights. However, it might complicate the process of demonstrating general tasks such as painting, flooring or lumber.

The bottom line: Take precautionary measures to ensure payment because funds will only flow down based on the progression of a project. Creating an emergency action plan and customizing those plans to each individual job site is a great way to spearhead any issues. Being proactive means taking the initiative and testing your plans to minimize the maximum amount of risk.

-Kendall Payton, editorial associate