Working Through COVID-19 in Construction

There is always some sort of risk for credit professionals when a credit application comes in or the salesperson knocks on the door with a new customer. The risk of nonpayment for goods and services rendered is always at the back of a creditor's mind no matter how nice and clean a transaction looks on paper. Even cash in advance can get tricky if there happens to be a bankruptcy. So, in the world of credit, nothing is 100%. The only permanence this year as in previous years, according to Benjamin Franklin, will be death and taxes.

COVID-19 has taken all that would previously have been called a sure thing and turned it upside down. The light at the end of the tunnel is approaching for some, as states begin easing regulations and reopening. However, that does not mean the coronavirus is gone. While some businesses will be able to rebound quickly, others will take years to recover, if at all.

No matter the industry, credit professionals are in the business of being paid for the extension of whatever it may be that is offered on credit terms. Some industries, because of their nature, have relatively short payment terms, e.g., food, but some sectors such as construction are known for having delays in payment. And, COVID-19 is only making the delays worse.

With every cause, there is an effect and with every action there is a reaction. When a raindrop or a rock breaks the surface of a pond, there are ripples that impact the ecosystem. The same goes for payments in the construction industry. One item out of place can cause a ripple effect, growing in magnitude as it expands.

In NACM's recent webinar, "Life After COVID-19: Contract and Practical Considerations," presented by Seth Robbins, Esq., of Robbins Law Group, PLLC, he spoke of problems and solutions. New to the vocabulary for many during the last several months, social distancing is causing quite a stir for construction projects. Social distancing wasn't given much thought prior to COVID-19 by credit professionals, or anyone for that matter, but it has infiltrated projects on a grand scale. The new reality is that there are additional costs to manage projects—cleaning, quarantining, social distancing, said Robbins. The workforce and deliveries are among the biggest impacted by social distancing policies.

Making a change to the contract is a way to combat the rising unforeseen costs moving forward and to help mitigate risks. Changing or adding contract language can help if certain disclaimers, provisions and clauses are used correctly. Working in price acceleration and escalation clauses as well as bid disclaimers can help credit professionals better prepare for uncertainty as well.

It's also important to continue to do due diligence up front when signing new contracts to get as much information as possible. This is done most of the time regardless, but "it's now even more valuable," Robbins said. Projects and products must be managed and monitored more closely than ever.

Robbins also noted mechanic's lien and bond claim rights should not be ignored. "Don't give up on lien and bond rights. Mechanic's lien rights are extremely important … [since] you may not be collecting as soon as you thought." Just because credit terms are extended or additional credit lines are given, doesn't mean credit departments are going to get paid. "You need to make sure you're protected downstream. Projects are going to deal with bankruptcies. You're in a much better position if you have a lien in place … [going] from a general unsecured creditor to … hopefully getting paid out of contract proceeds for that project."

-Michael Miller, managing editor