By Christopher Doyle
As a construction contractor, the success of your business depends on continuing to work. It’s as simple as that. But with the economic downturn and construction halts or delays in the wake of the COVID-19 pandemic, many are struggling with projects that aren’t moving forward, whether temporarily, indefinitely, or for good.
How construction is being affected largely depends on location. There are no federal guidelines for the construction industry during this health crisis, so state and local governments are issuing their own rules along with shelter-in-place or stay-at-home orders. While states like Texas and Colorado have given the greenlight for residential and commercial construction to continue, areas such as New York City and the San Francisco Bay area have completely halted all but what are deemed “essential” projects.
How can you protect your business during this challenging time when the future of your project or projects is uncertain? Here are the top six scenarios you might encounter now or in the near future, along with risk-mitigation measures you can implement to help support continued success.
1. NO CHANGE TO PROJECT STATUS
Even in locations under shelter in place, essential construction projects such as hospitals, low-income housing and vital infrastructure should continue to move forward with no funding roadblocks or delays. If you happen to be on one or more of these projects, great. Try not to panic about how the current state of affairs will affect your cash flow, because the expected outcome is unchanged—to an extent.
What you do need to plan for is updating and enhancing your jobsite safety precautions to help keep your employees and crews safe from the spread of COVID-19. You can find comprehensive resources on the Associated General Contractors of America website: www.agc.org/coronavirus.
2. SHELTER-IN-PLACE SHUTDOWN
In this scenario, you’re on a project such as a parking garage or shopping center that’s deemed non-essential under your state or city shelter-in-place order. (Or perhaps, in the case of New York City, all construction moves forward at first, and then updated guidelines specify only “emergency projects” can continue.) Again, rules vary widely based on your location, so check this helpful interactive map to determine which projects are considered essential in your area:
Assuming the halt on construction only lasts a month, the shelter-in-place-shutdown isn’t a huge risk to the future of your business overall. Like a project needing only exterior work during a month-long stretch of rain, pausing for 30 days doesn’t mean funding for the project won’t continue to flow—it just means your crews can’t go to the jobsite. Now it becomes a question of what to do with them until this particular storm ends. One option is setting employees up with remote training opportunities (osha.com) so they’ll emerge even more equipped to lead successful projects when the shelter in place is lifted. The other option, which is unfortunately the case in many industries at the moment, is furloughing employees until bans are lifted and project work picks back up again.
Though you still have to float your overhead costs during this time, without materials or labor expenses, you should be fine to resume once projects resume. The key is being proactive about taking measures to mitigate your risk while projects are temporarily on hold (like not ordering excess material), as well as being upfront with your staff about the changes they should expect.
3. SUBCONTRACTOR LIQUIDITY ISSUES
If another subcontractor on your project experiences financial distress and is forced to shutter, their sudden liquidity issues could mean bad news for your business. For example, if you’re a drywall contractor and the electrician on the project goes out of business halfway through the electrical work, you can’t drywall the building until the electrical rough-in is complete. The general contractor may have trouble finding a new subcontractor to finish the work quickly, and the new one may prefer to rip everything out and start over due to liability issues. In other words, you’re going to be stuck for a good amount of time before you can get started.
In this situation, your best move is to remain in close contact with the general contractor about the project status. Send weekly emails inquiring about what’s happening currently and what future delays they might anticipate. Across the board, it’s a good rule of thumb right now to limit project expenses that aren’t immediately reimbursable. Start buying materials in smaller, one-week increments in order to remain flexible. The key here is flexibility in all things. That way, if your business is affected by a shelter-in-place order in the near future, you can simply stop work without being left out on a limb with your budget sunk into materials you can no longer use. Even if you’re getting a great price on new inventory, if you can’t put it to work immediately, it’s going to be a drain on your finances.
4. DEVELOPER PAUSE
The uncertain future of our economy has consumers and businesses alike wanting to keep as much cash in hand as possible. For everyday Americans, that might mean skipping a mortgage payment or two until things settle—likewise, many developers may stop funding projects until their confidence in the market and their financial stability is restored.
Much like the shelter-in-place scenario, this would only mean the project is on pause, not completely at a dead end. You certainly won’t be operational on the project for a set amount of time, but assuming the cash starts flowing again within 60 days, it shouldn’t pose a major risk to your ability to stay in business. In order to stay afloat, it’s imperative to take proactive measures as soon as possible, such as furloughing employees and being diligent on large supply purchases.
5. GENERAL CONTRACTOR LIQUIDITY (RUNS OUT OF CASH)
If the general contractor on your project is in financial distress, the project simply will not move forward—and you as a subcontractor will be out anything you already spent. The developer could technically hire a new GC depending on the stage of construction, but that has its own challenges. Even if that happens, it could be 6+ months before the project is back on track.
Faced with this situation, your best course of action is to file a lien immediately to be reimbursed for the work you’ve completed on a private construction project, or file a bond claim in the case of public projects. Just because the GC goes out of business doesn’t mean the property owner or developer has gone out of business, and now they’ll have to settle with you before they close on the property if you have perfected lien rights. To maintain your right to file a lien, follow your state’s specific requirements for communicating with the other parties involved, such as sending a preliminary notice or a notice of intent, and ensure that you meet all required deadlines for filing documentation.
6. DEVELOPER FUNDING ISSUES
The last and the most risky of all scenarios (during our current crisis or otherwise) is a project developer/funder going out of business. When this occurs, everyone involved in the project finds themselves in a major financial bind. The general contractor and subcontractors alike are left with no options. You can still file liens but the property itself will likely never sell (depending on what stage it was stranded)—especially if the new owner has to satisfy all the lien rights for various contractors who were left high and dry.
In this case, all you can do is cut your losses, make cost-cutting adjustments as needed in order to stay in business yourself, and move forward with other projects that are likely to have more successful outcomes. This is a tough pill to swallow but ask any seasoned subcontractor, it’s part of the business.
We’re all living and working in a time of uncertainty and financial constraints. But by anticipating the conditions that might impact your projects, planning accordingly, and taking decisive action if and when these scenarios occur, it’s possible to remain flexible and continue running your business successfully despite the circumstances.
Editor’s Note: If you have a story to share about your construction project and the affect of COVID-19, email me at firstname.lastname@example.org.
About the author:
Christopher Doyle is an entrepreneur and business leader with extensive hands-on construction industry experience and a proven record of launching successful startups. He is the co-founder, president and CEO of Billd, a disruptive payment solution for the construction industry. Doyle cut his teeth in the construction industry, framing houses in high school at age 16 and working his way through college at Texas A&M before beginning his career in residential and commercial construction. He was inspired to launch Billd to bring the financial power of Wall Street to the construction jobsite, allowing contractors to bypass project hurdles with access to upfront funds while enabling suppliers to sell more materials with less risk.
Billd is a payment solution that helps commercial contractors obtain 120-day payment terms with their suppliers. Here are the steps: (1) Contractor submits their material quote from their supplier (2) Billd pays supplier directly on the contractor’s behalf (upfront) (3) supplier ships the material and (4) Contractor pays Billd within 120 days for the purchase. For more, visit www.billd.com.
Modern Contractor Solutions, April 2020
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