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 CMA-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. CMA has tools to give detailed information on each state’s procedures and policies.