Construction Industry – Pitfalls to Avoid

For the most part, the construction industry is struggling through
lean times. According to the U.S. Department of Commerce’s U.S. Census
Bureau report for May, for the first five months of 2008, construction
spending totaled $416.6 billion, 5.1% below the total for the same
period last year. Residential construction spending continues to
topple, dipping to $378.9 billion in May, 1.6% below April and 26.9%
below May 2007. Private construction spending as a whole has shed
almost 10% year-over-year.
     

With standards remaining
tight in the credit markets, the impacts are being felt the length of
the value chain. There is a trickle-down effect from the creditors to
developers, from the developers to the builders—who are sitting on a
large inventory of homes—and from the builders down to the
subcontractors. In his NACM-sponsored teleconference "Pitfalls to Avoid
in Being a Subcontractor on a Construction Site," Byron Saintsing,
partner, Smith Debnam Narron Wyche Saintsing & Myers, LLP, shared a
wide range of information from lien claims and payment bonds to
bankruptcy issues to help subcontractors and other construction site
partners keep their heads above water during difficult times.

     

"The
market out there today, at least on the residential side, is in pretty
bad shape and I think everyone knows that," said Saintsing. "If you are
dealing with and are selling to a subcontractor that’s on the
residential side of the market, chances are that they have hit some
bumps in the road and if they haven’t, they’re going to."

     

First
and foremost, Saintsing suggested maintaining high credit standards.
There is often pressure from the sales department when sales are down
to ask credit departments to cut corners, extend terms, create special
terms and simply relax standards across the board, but from the credit
managers’ perspective, this is the time to remain firm.

     

"Now
is not the time to loosen your credit standards," stated Saintsing. "If
you do, I’m afraid you’ll see your bad debt write-offs continue to go
up, not down."

     

Saintsing recommended that credit
professionals examine their documentation and make sure contracts are
being properly executed. If they are taking collateral, they want to
take a look at things like proof of delivery, verification of where
that collateral is and they want to make sure that their UCC-1
financing statements are properly filed. Customers need to be examined
to determine what kind of ability they have to repay the credit that’s
being extended to them. Due diligence needs to be practiced with credit
and trade references, as well as with financial statements and credit
reports.

     

"You want to take extra precautions in this
environment to verify who your customers are and what kind of entity
they are," explained Saintsing. "You really do need to know on the
front end who you are dealing with and what their ability to pay is.
The time to ask those questions is not on the back end when you have a
payment problem."

     

There are legal avenues available
if payment problems do occur. For example, if a bankruptcy has been
filed, or imminent, credit managers are eligible for reclamation rights
under the Uniform Commercial Code. Non-bankruptcy law reclamation
rights state that creditors have 10 days after their customers received
goods of sale to give notice of reclamation if the customer was
insolvent when they received them.

     

"That’s not very
much time, so reclamation rights, in the real world, are hard to
assert," said Saintsing. "It’s easy for a lawyer like me to say, ‘Sure,
go file a reclamation notice.’ But in the real world, not many people
are paying within 10 days, so it makes it tough to use reclamation
rights. But they are available."

     

Of course,
mechanic’s liens on private projects and payment bonds on public
projects are courses of action as well. But because statutes vary from
state to state, credit departments need to have resources that specify
all the nuances to ensure they are eligible to recover what’s due to
them. Tools like NACM’s Mechanic’s Liens and Bonds Services’ (MLBS)
Lien Navigator give detailed information on each state’s procedures and
policies.

     

Matthew Carr, NACM staff writer

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