This is an article contribution from Handle.com, a construction payment management solution.
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Almost half a year since the first recorded case of COVID-19 in the country, many countries like Australia have been relatively successful in curbing the spread of coronavirus.
However, many businesses will continue to experience residual effects long after we’ve flatten the curve and no longer see coronavirus as a health threat. The threat comes in different forms—both operationally and financially. One of the industries most impacted by the residual effects is the construction sector.
Impact of COVID-19 on the Construction Industry
The construction industry may hold the key to kickstarting the economy ravaged by the COVID-19 crisis. Our experience with past crises has shown that though the private sector may be reluctant to invest in an uncertain economy, governments can stimulate the country through investments in infrastructure projects.
Indeed, several construction projects have now reopened with new safety protocols in place to combat the spread of coronavirus. Seeing lines of construction employees starting the day with their temperatures checked and working from a safe distance from one another seems to be the new normal.
However, the fact remains that the construction industry is reeling, perhaps even more than other industries. The greatest challenge brought by COVID-19 is global supply chain disruption.
Over the past decade, construction businesses have relied on importing building materials and equipment overseas due to their low cost. With most factories closed to prevent the spread of COVID-19, production has declined. Many civil contractors have looked for alternative sources locally to continue operations, often at inflated costs.
Another impact of COVID-19 on construction is workforce limitation. Because of the social distancing requirements imposed by the government, contractors had to reconsider how to operate while on site. Some have even gone as far as splitting the workforce, a safe option to reduce the risk of COVID-19 transmission at the cost of productivity. Because of this, projects can take a longer time to finish and incur additional expenses.
Some construction businesses were not as lucky as the others in the face of the current crisis. With many construction projects temporarily stopping operations, the loss of income has led smaller subcontractors to close down. The construction industry has always been difficult to partake in, with its low profit margins and countless payment issues. These trade and subcontractor businesses going bankrupt is detrimental to active construction projects, causing a shortage of labour and further project delays.
Most countries declared the construction an essential business and have exerted a lot of effort to keep construction sites open.
The industry is crucial to the reopening of the economy as it generates over $653 billion or around 6% of the country’s GDP. The government has provided stimulus packages and even extended work hours on construction sites in an attempt to support businesses during this time.
Revenue Protection in the Time of COVID-19
While the government’s measures will sustain the industry over the coming months, many contractors remain troubled about the economic downturn and uncertainty. The challenges brought by the COVID-19 pandemic have made apparent the need for contractors to be proactive in protecting their sources of revenue.
Here are some tips on how to protect your cash flow in the time of COVID-19.
1. Know the state of your finances
The first step that you need to take is to assess your financial standing. Knowing the state of your finances will give you a solid ground for your financial decisions. Consider how much cash you have that is readily available for business emergencies.
Having a significant cash cushion can help you weather the financial crunch in the months to come. With the increase in material costs and additional expenses from project delays, you will need more than the usual amount of cash to continue your operations. Assess how long it will take before your operational expenses consume your tax reserves and plan accordingly.
With the opening up of the economy, cash will become relatively easier but still nowhere near the level before the pandemic. If you had plans to acquire equipment and other capital investments, it is time to rethink your decision. You may have to consider looking for some financing options that can support you in case of emergencies.
2. Restructure your client acquisition process and contracts
Payment issues have always plagued the construction industry. But with the current crisis, there is a high likelihood of acquiring delinquencies. In order to avoid writing off your receivables, you may have to restructure your client acquisition process to account for the current situation.
Do your best to protect your revenue sources by conducting vigorous credit checks and ensure that your clients are creditworthy. If possible, demand payment references or collateral and be proactive in getting progress payments. You may even alter your billing cycle to a shorter one.
Aside from this, ensure the construction contract is tight before signing the deal. The provisions should be clear and the roles of each party in the contract should be well-defined. Avoid any jargon that may confuse non-industry mediators. The scope of the work should also be clearly stated to prevent any scope creep that may further increase project expenses.
3. Protect your right to file a worker’s lien
As previously mentioned, having delinquent clients can become common in the wake of the COVID-19 crisis. That is why it is important to take note of the tools that you can use to get paid on time and in full for your work. The worker’s lien is one such tool that lets you encumber a property where you had provided labour or furnished materials for which you were not paid. The property owner will be unable to sell, mortgage, or lease the property until the debt is paid.
Filing a workers lien can be a complicated process and is usually done as a last resort. When dealing with a delinquent client, you should exhaust all avenues to compel the owner to settle the payment.
Give strict reminders about payment deadlines and send demand letters for accounts that are way past due. If you still don’t get paid, do not hesitate to file a worker’s lien to get your rightful payment.
There is no one-size-fits-all remedy when it comes to dealing with the challenges brought by the COVID-19 crisis. However, many of the decisions you make now will directly impact how successful you can weather the crisis. Every dollar counts, now more than ever.
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About the Author
Patrick 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.