Where Is the Cash Flow?
David C Phillips / January 2021
The construction industry is already notorious for making it hard for contractors to get paid during even the best of times. The unprecedented COVID-19 pandemic has disrupted many aspects of normal daily life, so we were interested to know whether or not it has made the collections and cash flow situation even more difficult for AWCI member contractors, and to share whatever successful actions AWCI members have come up with to deal with the situation.
The answers to our questions were, as usual, quite varied and revelatory. They confirm that the effects of the pandemic have been noticeably different from company to company and in different parts of the country. There are, however, some common denominators, and this article will provide our readers with useful advice.
Getting Paid, or Not Getting Paid?
Our first question was to determine whether or not COVID-19 is having an effect on payment and cash flow. The short answer is, “Yes … and no.”
Ollie Holden, president of Holden & Flynn Universal Contractors, Inc. in New York, confirms, “Yes, it has affected payments on lots of projects and is being used as a reason to extend out payments that are way overdue.”
In Long Island, N.Y., Christina Verderame, consultant with Ess & Vee Acoustical Contractors, Inc., details the effects the pandemic has had on their collections: “It is becoming more difficult for us to be paid on time. With more people working from home and disconnected from their co-workers responsible for payment, it is taking longer to get in touch with the responsible parties. A few companies have changed their methods of payment to wire transfer as there is nobody in the office to sign checks—this is a positive change, as it is faster and more direct.”
She goes on to give some actual examples of how companies are responding to payment requests:
From one customer: “Due to the COVID-19 virus, checks are only being mailed. Please return the signed waiver to release the check.”
Another: “Each week, our controller has over 200 checks sent to his home residence, where we are doing our best to sort and shoot out waivers at the first opportunity. Each day, when he has the opportunity, the controller personally drives to a FedEx location to drop them off.”
And a third: “Please have your accounting department send me their W9 and their wire instructions for payment. As you know, we are working remotely and there is no one to sign checks; therefore, we are paying our vendors with wire transfers.”
Steve Winn, director of credit at Marek Brothers in Houston, Texas, describes their current experience with regard to collections and cash flow: “When COVID hit and the local government shutdowns started, we saw some project owners react by putting their projects on hold for an indefinite period of time. A couple projected that they would not open the project up for completion for six months or even until 2021. Our lien rights in Texas are triggered by date of performance—the clock starts ticking when the project is ‘completed, terminated or abandoned.’ With the projects potentially stopped for six months or more, the question arose as to whether the shutdown of the project would fall into one of those categories. Our attorney confirmed this was likely. Not knowing how the government shutdowns would affect the economy, our customers and their customers, we decided to monitor the COVID effects on all projects and be prepared to file our liens even if the projects were technically still in progress.”
For a number of companies, however, the pandemic does not seem to have affected payments due. Brent Allen, vice president of Compass Construction in Ohio, speaks for one of them: “We have had no issues.”
Norman Kay, manager at Pro-Wall LLC in Englewood, Colo., reports, “Slow pay continues as normal in this business, with subs carrying the burden of the financing to cover the poor cash flow. But this is business as usual for us. What has changed is the banking industry tightening up and credit being scrutinized, as well as insurance companies not wanting to take on new risk. We were forced to stay with last year’s broker, even though a move would have been welcomed this year.”
The lack of any real effect on payments and cash flow for many is confirmed by Bill Fritz, president of Mission Interiors Contracting, LLC in Texas; by Michael Mazzone, president of Statewide General Contracting and Construction, Inc. in Hawaii; and by Stan Kasper, president of The Rockwell Group in Illinois and Wisconsin. Kasper also adds, “The biggest overall COVID-driven issue is that owners are not making decisions in a timely manner on the start of new projects.”
New Circumstances, New Actions
Next we asked about the specific actions that AWCI contractors are taking to remedy slow/late/no payments.
Key to collecting money owed in the construction industry is to exercise mechanics’ lien rights. Lien rights are rights bestowed upon construction project participants to file a mechanic’s lien or bond claim in the event of nonpayment on a construction project. If the claimant remains unpaid, the claimant can enforce a foreclosure action on the property and receive payment from the proceeds of the sale of the property. These rights are unique to the construction industry and apply to some extent, though with some differences, in all 50 states.
Winn detailed the actions that Marek Brothers has taken. “Obviously, we are taking a conservative approach to protecting our well-earned money with a strict interpretation of the lien laws,” he explains. “The intensity of our collection efforts has not changed; however, we have adjusted our methods. We utilize a mailing service for our lien notices, which has saved us a tremendous amount of time and energy preparing and mailing these critical lien requirements. We are usually more liberal with credit extensions, and we take a more critical look at potential customers knowing that we could see a rise in bankruptcies on the part of both contractors and project owners.”
“We are constantly on the phone with the principals of the companies looking for payment and even talking to owners themselves,” says Holden. “And yes, we have had to resort to filing liens on some projects.”
Verderame says, “We are being more careful in terms of making sure all the correct paperwork is in order before proceeding with change orders, not taking chances with companies that we haven’t worked with before. During these times it is especially important to know the financial status of the companies we are working with.”
“I make note on the proposal that we will collect money on the day of completion, and we show up to collect the check,” says Fenya Slack, operations manager at Ivan’s Drywall & Painting Inc. in Minnesota. “If the scope includes hanging, tape, texture and paint, I let the client know that I will collect for hanging before we proceed to taping. That way we’re being paid along the way.”
Mazzone says, “We have made a recent change in our pre-contract documentation. We now ask every contractor for their W-9 form before we return the subcontract. We also collect the bond company information. Now when we submit our final month progressive billing, we also send a letter to the bonding company informing them of any retention or other open balance. This extends our ability to collect on the bond from 45 days to one year. If the job has not closed in the one-year time period, we push the bonding company to close us out. Since the general contractors don’t want a negative report with the bonding company, they pay early. As much as possible I have been lining out any wording in the subcontracts that states we will be paid for our work only if the owner has paid the contractor.”
“One job I stopped last March/April when all this started,” says Adam Barbee, estimator/project manager at Daley’s Drywall in Campbell, Calif. “I had material on site and a quarter of the work had been completed. The owner completely stopped. It took several months to receive payment for the labor and materials on site. Too many individuals try to use the pandemic as a procrastination tool. You, of course, need to be persistent about what you’re owed, which is easier said than done.
“One measure that really helps in a big way is monthly billings,” he continues. “If billing is not being met, you cannot move forward and fund the job. It’s very important to front load whatever SOVs (Schedule of Values) you can to create as much surplus as possible to keep the boat afloat. If we do not receive payment, we then go down the preliminary-notice road.”
Fritz says, “We have always been consistent about intent notices and filing liens. That will not change. We do call on the day the invoice is due if we have not received payment, asking for the status of payment. If we have a client who continually goes past term, we ask them to sign a personal guarantee.”
“We have not changed anything as far as collections go,” says Kay. “But after 34 years with the same bank, I find myself seeking a new banking relationship this year due to the current very poor business ethics of the bank. Another thing I am looking at is credit-card relationships and options, to help carry the slow payers and negotiate better options to bridge the gap with them.”
What Really Works?
Of the various actions that have been implemented, which ones were most successful?
“In the earlier months of the shutdown, our cash flow remained strong, as the funds for the projects were already committed to the project,” says Winn. “A handful of owners even paid early to ensure continued progress of their project. Even now, the money still appears to be flowing, though the new stream of projects has been slowing.
“We credit the team effort of our operations: IT and credit staff stepping up to the challenge of a changed economy and changed work environment—many are working remotely. The investments we made in our infrastructure set us up to succeed in these unprecedented times. Zoom and Teams calls have enabled us not only to get our work done, but get it done more efficiently than we did last March.
“What is particularly successful in collections is doing what we have always done:
- Remember the 4 C’s of Credit: character, capacity, capital and conditions—especially conditions.
- Call the customer and follow up.
- Ask questions and obtain information.
- Then respond appropriately.
“If I had to sum it up, I’d say that to succeed in challenging times, it’s so important to utilize smartly available technology, communicate better, and stick to the fundamentals!”
This is good advice generally. The more unusual the conditions, the more one has to stick to standard actions and solutions that have proven their worth over time—while still remaining flexible, rather than trying to come up with some untested and unproven new idea.
Holden recommends “persistence, along with threats of liens.”
“Direct contact with the higher-ups in the company, persistent follow-up and documentation,” says Verderame.
Fritz explains their approach: “Our terms vary depending on client. Few are net 10 days after invoice, which helps with cash flow. The majority have the invoice on the 25th, payment on the 20th following. We do not offer discounts if paid early, but we price their projects more competitively if they are a consistent on-time pay client.”
“Reputation is everything,” summarizes Barbee.
As usual, AWCI contractor members weighed in with sound, practical advice based on their own success. Anyone experiencing credit collection and cash flow problems as a result of COVID-19, or in general, should find some helpful tips in this article.
David C Phillips, a freelance writer and photographer, is an original founding partner at Words & Images.