{{Article.Title}}

{{Article.SubTitle}}

By {{Article.AuthorName}} | {{Article.PublicationDate.slice(6, -2) | date:'EEEE, MMMM d, y'}}
{{TotalFavorites}} Favorite{{TotalFavorites>1? 's' : ''}}
{{Article.Caption}}

2020 brought scores of jobsite shutdowns, project delays and payment disputes to the construction industry. Everyone is ready for COVID-19 to be over, so the world—and construction projects—can get “back to normal.” But for many contractors, “normal” was never very good when it came to cash flow, making informed credit decisions and collecting payment.

For construction before coronavirus, “normal” meant waiting an average of 80+ days for payment. It meant unfair contractors withholding retainage payments to pad their own pockets. “Normal” meant haphazard jobsite coordination, poor communication, and often having to threaten a lien just to get paid. In 2021, construction businesses should set the bar higher than “normal.”

A lot changed in 2020. Contractors didn’t.

In a pre-pandemic construction survey, contractors reported that poor jobsite coordination was delaying payments; fewer than one in three said they always finished projects on time and under budget. Nearly half said they are forced to wait longer than 30 days for payment on a typical job. Any payment delay forces contractors to finance their customers’ businesses, effectively making them play the part of a lender. The longer payment takes, the higher the cost burden to the contractor.

That was the reality even before the coronavirus pandemic upended the economy, shutting down construction jobs and putting a hold on many financing options. For contractors across the country, the normal squeeze on cash became a vice. The SBA’s Paycheck Protection Program was a welcome lifeline for some. In a payment survey from August 2020, nearly one in three general contractors and subcontractors said they applied for funds.

But in that same report, an even greater number—39% of contractors—reported they haven’t made any business changes in response to COVID-19. That’s a problem.

For better or worse, construction will change in 2021

2021 is poised to bring some exciting new trends in the building industry, like greater investments in modular construction, new residential homes in suburban and rural areas, advances in remote technology, and living materials that are self-healing. But less attractive changes are also likely in the new year. Material shortages are likely to continue for a while as exporting countries struggle with pandemic response and vaccination. Bankruptcies are on the rise, particularly in retail, a sector on which many construction companies rely heavily.

Of course, the resistance of some construction markets to pandemic impact has made it easier for companies to put off changes. Residential starts hit a decade-long high in October, buoyed by low interest rates and work-from-home requirements. This has likely insulated homebuilders from the financial pressure that their counterparts in commercial and public work have been under.

But no sector of the economy is an island, and even residential contractors need to prepare for ripple effects that are bound to come.

A contractor road map for 2021

In general, there are two paths forward from a macro view. In one, rapid vaccination, low interest rates, and federal stimulus lead to a sharp economic rebound and a construction boom. That may well sound like the best case scenario. But a rebounding economy can be just as disastrous for contractors as a recession, if not more so. Rapid growth puts a heavy strain on cash flow. Contractors are three times more likely to fail in a recovering economy.

In the second scenario, mounting financial pressure and uncertainty drive global markets further into a recession. The resulting increase in bankruptcies, lost revenue for state and local governments, and worsening consumer confidence can lead to a bear market for construction—even in the currently rosy residential sector.

Construction businesses need to prepare for either outcome. Both carry risk, and the response to each requires careful planning. Waiting is not an option.

In each scenario, a contractor’s ability to manage their cash flow will mean the difference between survival and failure. Whether the construction industry experiences a rebound or recession, having cash on hand will be critical to weather whichever storm comes. Even a single missed payment or delayed receivable can put a contractor’s future at risk.

Good cash flow demands strong credit and collection policies, and mechanics lien security on every project. Debt secured by a lien is prioritized in the event of a bankruptcy. Unpaid contractors who give up their lien rights will be left with little-to-no recourse to collect. It also requires contractors to take a selective approach to bidding. Customer prequalification becomes even more critical in an uncertain economy. Contractors will need the tools and resources to monitor their customers’ cash flow as well, and spot red flags before a customer’s payment problems disrupt their own business.

In 2021, contractors waiting for “back to normal” will just get “more of the same.” And the same isn’t good enough.

Print

 Comments ({{Comments.length}})

  • {{comment.Name}}

    {{comment.Text}}

    {{comment.DateCreated.slice(6, -2) | date: 'MMM d, y h:mm:ss a'}}

Leave a comment

Required!
Required! Not valid email!
Required!