SilverLink - Spring/Summer 2008 - (Page 8)

Even if you have a legitimate right to payment and have secured your position with liens, a delay in payment can have a devastating effect on your operations. One of the leading causes of contractor failure is “hung receivables,” due to the obvious impact lack of payment has on cash ﬂow. Even if a contractor has enough cash to make it to project completion, the bonding company may restrict capacity or refuse to extend surety credit until payment is received. At a minimum, the surety will discount working capital, and possibly net worth, by the amount of receivables over 90 days past due. Due to current conditions in credit markets and the economy in general, credit risk for the construction industry is likely to increase signiﬁcantly over the next few years. How well a contractor manages his or her credit risk could mean the difference between success and failure. The following suggestions provide a framework for developing a sound credit risk management policy: • • Know the lien laws and payment bond statutes in the state where the project is located—Be certain that you have up-to-date procedures for ﬁling liens or payment bond claims within the mandatory ﬁling period. If you would like to receive a matrix of laws from Nebraska and surrounding states, please contact SilverStone Group at the number listed below. • Establish procedures for handling payment issues— The primary objective is to stay on top of situations and control the amount of risk instead of allowing small issues to escalate. The deeper your investment in the project, the less control you have. A good way to stay in the loop is to review the accounts receivable aging schedule each month. • Pre-qualify the project owner—The general contractor should have primary responsibility for doing this, but pre-qualifying is also a good practice for subcontractors. How well do you know the owner? Have you worked for him or her before? What is the owner’s organizational structure? If it is a single-purpose LLC or partnership instead of a corporation, you may want to investigate more thoroughly. Pay attention to the economic conditions of the owner’s industry. As an example, the ethanol industry has begun showing signs of distress; as a result, you will want to use extra diligence during the prequaliﬁcation process for any project related to this industry. • Manage your risk contractually— Avoid clauses such as “waiver of lien rights.” If you are a subcontractor, make sure the general contractor didn’t waive lien rights in the contract with the owner and then incorporate the contract with the owner into your subcontract. Beware of anti-passthrough provisions and disputed-work clauses. Seek legal counsel— It is a good idea to visit your attorney before you sign change orders or other documents that may release lien or bond rights or contract claims. You should also plan to contact your attorney well in advance of mandatory ﬁling dates. The legal cost of recovery can be much lower if your attorney is well-prepared with lien/bond rights and reservation of cost and time impacts. Bill aggressively— Remember the cynical version of the Golden Rule—“the one who holds the gold makes the rules.” Try to stay ahead by overbilling the project and either gain control or at least reduce the amount of control the owner has over you. Negotiate better retainage provisions—You might accomplish this by asking for no retainage withholdings after the job is ﬁfty percent complete. Not only does this improve your cash ﬂow, it also reduces the dollar amount you have at risk at the end of the project. • • Verify nancing— Obtain written veriﬁcation from the lending institution, including details of the facility. This information is necessary whether the job is bonded or not. If the owner uses equity funds for a portion of the funding, make sure the money is in escrow or that some method is in place to ensure that the equity funds will be available. If at all possible, ask the bank for a set-aside letter so you are conﬁdent the funds are speciﬁcally dedicated to your project. It’s also a good idea to check the available funds status throughout the entire duration of the project. • • Monitor change orders— If a project experiences ﬁnancial trouble, you do not want to be left holding unapproved or verbal-only change orders. Be certain that stringent change order procedures are in place to ensure that you receive signed change orders before you undertake a material portion of the additional work. Also, if the change orders for a project increase the project budget by ten percent or more, verify that ﬁnancing is available to cover the increased cost before you begin work. Establishing a formal credit risk management policy has the potential to help prevent serious receivable issues. In the event that you do encounter a problem, you may ﬁnd yourself in a better position to respond to the situation proactively. Trying to manage your credit risk without a speciﬁc plan could generate unpredictable results that are heavily dependent on luck. And while everyone gets lucky now and then, the best kind of luck is built on hard work and good planning. CONTACT DOUG IRVIN AT 402.96 4.5568 OR DIRVIN @ SSGI.COM 8

Table of Contents Feed for the Digital Edition of SilverLink - Spring/Summer 2008

SilverLink - Spring/Summer 2008 Contents Risk Management: Mitigate & Educate Disastrous Distractions Accounts Receivable BoomerCare Risk Reduction, What’s Your Function? Time Out! Double Down Employee Benefits: Who’s Paying Whom for What? Time to Reconcile Keep Your Eye on the Pension Prize Show Me the Money Private Client Services: A Generous Strategy Is There Any Good News Left? Special Insurance for Special Times Client Spotlight: Omaha Performing Arts Internal Happenings: SilverStone Group Wellness Activities Group

SilverLink - Spring/Summer 2008

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