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By: Patrick Hogan on December 9th, 2020

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Protecting Construction Cash Flow During Tough Times

Operating Insights

Many construction companies operate on razor thin margins and most are definitely not strangers to cash flow issues. Compound those with a crisis and things can get rocky fast. However, dealing with financial hardships and challenging stretches in business life have given contractors and other construction business owners the skills and steadfastness to withstand difficult times.

As the world faces uncertainty, construction is one of the industries that continue to march on. But, given the bigger context, it’s important for construction business owners to safeguard their cash flow and protect their revenue.

Here are five ways to protect revenue in construction, something doubly important during this time.

Maximize Legal Avenues

Since construction is such a big industry that weaves itself throughout many different fields, it also is the subject of a big chunk of legislation. Protecting revenue in the time of crisis demands being familiar with legislation concerning construction inside and out. All states have laws that protect both clients and contractors when it comes to construction contracts. On the side of the contractor, state mechanics lien laws is definitely a must-know, inside and out.

A mechanics lien is a legal claim on the construction property in case of nonpayment—something you can leverage in case you’re having an issue getting paid. It varies state to state, but most states require that you file a preliminary notice, a notice to owner, or a similar form to secure and protect your right to file a mechanics lien in the event that you find it hard to receive payment from clients or general contractors. Make sure you file the necessary notices to secure your right to lien, just in case.

Vet Clients

While it may be tempting to accept every project especially in times of financial crunch, it is even more prudent to vet clients thoroughly first before signing on the dotted line. Check their documents, inquire on their liquidity, and make an informed judgement on how you think a contract will go in case of a deal. Don’t be a victim of rushing into things, especially if something is too good to be true. Remember, in times of crisis, almost everyone is affected. You might end up absorbing a ton of risk if you don’t vet your clients.

Ensure Ironclad Contracts

Once you’ve vetted your clients, don’t be lax. Always require a contract, no matter how small a project is. Ensure that everything— from deposits, retainage, and cost estimates—is in order before you sign. Also remember that reusing contracts and only replacing the amounts is not a good practice, you could be putting yourself in greater risk of financial loss if this becomes a habit.

Be Financially Conservative

Even when business is good, being financially conservative always benefits you. Review your finances periodically and consult with professionals if needed. Make sure that you always have enough to cover taxes, payroll, and other overhead expenses. It can be that during good times, pushing the limit of your cash flow pays off. However, during a crisis, this might not pay off well for you. You don’t want to find yourself cash-strapped when financing options are hard to come by because everybody is trying to get a loan—or worse, you don’t want to be forced into predatory interest rates because your back is against the wall.

Retain Your Best People 

Protecting your revenue also means making good on the projects you do sign on to, and the key for this is to hold on to the people who you know are reliable, trustworthy, and deliver good work. In times of crisis, employee turnover is high so job anxiety can be something your people are dealing with. This can impact their work performance, in turn affecting the quality of your work and your reputation. During tight periods, reputation is everything. Retaining your best people leads to retaining your contracts and getting repeat customers—so take care of your employees!

These are just some strategies that you need to keep in mind in times of financial crisis. Construction is one of those fields that can sustain itself even on tough times, so you want to make sure that you’re doing your best to stay part of that forward march.

Patrick Hogan photoPatrick Hogan is the CEO of Handle.com, where they build software that helps contractors, subcontractors, and material suppliers with late payments. Handle.com also provides funding for construction businesses in the form of invoice factoring, material supply trade credit, and mechanics lien purchasing.