12 Lessons Learned During the Great Recession to Increase Your Recovery Rate
by Mark A. Cobb
Tragedy faced many construction business during the Great Recession. It impacted every layer of business from project developer and large prime contractor to building material supply stores and day laborers. Virtually no one was left unscathed.
This year, thankfully, there has been a turn-around in the construction industry. There are new public projects, new industrial and commercial projects, and new home construction. In fact, we poll our clients constantly, and the signs of prolonged improvement to construction economics are evident. Nonetheless, we should not forget the lessons that were learned during those recent, lean years.
Smart businesses learned from the mistakes revealed during the recession, and they have improved their efficiencies, they have reduced waste, and they have recognized the need for customer appreciation. When our clients call us and ask us to help consult on their construction business, we start with areas which devastated many industry participants. Here are some of the common suggestions which we make:
1. Fix Your Customer Contracts! Many specialty trade contractors have never used an attorney to prepare their construction contracts; or, if they did, it was a long time ago. This is a big mistake. True, laws change and your contracts should reflect these changes, but, more importantly, many client’s contract give up their rights because they started with sloppy contracts. For example, it is easier (and less expensive) for you to collect attorneys fees when you go after the money you are owed if your contract adequately addresses attorney’s fees. Unless an experienced construction lawyer has worked with you on your contract, then you may forfeit these rights.
2. Negotiate/Review Your Contracts: When a subcontractor works for a prime contractor, it is typical that the GC provides the subcontractor with a contract to sign. Wait! Have a competent Georgia construction attorney review the contract and negotiate it on your behalf. If you blindly accept the contract because “you need work” or because you are “too busy”, then you are gambling that the contract will protect you in case of a contractor’s failure to pay. In addition, due to the limited, skilled workers in the field, a subcontractor may have an easier time negotiating its contract than expected.
3. Shore Up Your Credit Applications: Business is good right now, but it’s worth taking time to update your credit applications, personal guarantees, credit card authorization forms, etc. The steps you take now can save you money in the long-run (and increase your recovery!)
4. Due Diligence: It doesn’t matter whether you are a large national general contractor or a local specialty trade subcontractor, few parities use the opportunity to conduct meaningful due diligence on their business relationships. We saw this failure to conduct due diligence bankrupt businesses in the second and third years of the recession, yet, it was totally unnecessary.
5. Document! Document! Document! Although it has been (and will always be) a significant area of contention, change orders presented many hurdles for subcontractor payment issues during the recession. Prior to performing work on a change order, make sure that you have the WRITTEN CONSENT of the general contractor and the owner of the project. Yes, its frustrating, yes its
6. Document Problem Areas. Similarly, when any issue erupts on a project site, document it, and document well. For example, keep thorough, complete daily logs, take photo graphs, document the issues in writing. Also, of course, make certain that you meet any notice deadlines required in your contract.
7. Be Wary of Email. Email (texting too) is a blessing and a curse in the construction industry. Email consents can be useful, however, they tend to be vague and / or out of context. When it come to something important, write a letter–at least write a “letter-style” email which is more formal. Assuming your contract doesn’t contradict this, you can probably send your letter via email, but a letter forces most writers to more-fully develop the situation and place it in the correct context. This can save ambiguity, confusion or “he-said/she-said” situations down the road.
8. Watch Out for Georgia’s Lien Waivers. If you execute a partial or final lien waiver in Georgia, make sure that you get your money very quickly. If you don’t get the money you are owed and if you don’t take certain steps within 60 days of the date of the lien waiver, then you may forfeit your right to payment forever. Assuming that a lien release is submitted with each pay app, then letting any invoice be out longer than 30 or more days hurts subcontractors immeasurably. Keep an eye on your receivables and remember to file either an Affidavit of Nonpayment or a Claim of Lien within 60 days of the date of your lien waiver for an unpaid Application for Payment.
9. Send a Notice to Owner/Contractor! During the recession, we hated telling clients that they had forfeited their rights to file a materialmen’s lien in Georgia because they had failed to send a timely Notice to Contractor / Notice to Owner (other states refer to this document as a Notice of Furnishing or Notice of Commencement of Work). Under current Georgia law, those in privity of contract withe the owner (i.e., general contractors and 1st tier subcontractors) do not have to send the NTO; those who lack privity of contract with the Owner (i.e., sub-subcontractors and material suppliers) must send an NTO within the first 30 days in which they begin work on the project or begin supplying to the project. Although this may seem like a hassle, it’s an inexpensive step and can increase your recovery rate significantly.
10. Payment Bond Claims. Many credit managers and construction professional understand that (most) government projects are required to have a payment bond in place for the benefit of subcontractors and suppliers; however, many do not know that often there are payment bond on private projects as well. And, if they don’t know about the payment bonds and don’t make a timely claim against the payment bond, then they may be losing a potential source of recovery. Don’t forget to look for payment bonds covering private projects!
11. Design Professional Have Rights Too. Traditionally, architects and engineers do not experience the same level of payment problems as other construction industry professionals, and this is usually credited with the fact that they are often paid first. The recession changed this, and all service and design professional have rights which may include the right to file a claim of lien for the money they are owed. Don’t let ignorance of Georgia’s law or professional “pride” prevent you from getting your payments by timely filing a lien for design services.
12. Mechanics & Materialmen’s Liens/Payment Bond Claims. Since we’ve been in this business for over 20 years, it’s hard to understand why everyone doesn’t file a lien if they don’t received payment for their materials, labor, services or equipment which they provided to a project. It’s vital that you meet the deadlines and all the technical requirements for filing a lien. Don’t let missing a deadline stop you from getting paid. Also, don’t forget that you can file a lien for your retainage — don’t let the time lapse to take this vital step.
Now, is a great time to position your construction business for the future, and the steps which you take now can make a world of difference tomorrow.