November 10, 2008

Sage advice for contractors facing the new economic reality

Construction Law

Norm Streu and Chris Hirst

It has been one hell of a party, but unfortunately the music has stopped and we are abruptly facing a new reality.

How quickly your company responds to the new reality may mean the difference between continued success and financial collapse.

Here are a few thoughts on how to respond to our current circumstances.

1. Reduce receivable risk. You can no longer assume that late payments will eventually arrive. Your business needs to aggressively managed. You must stay on top of its accounts receivables. Think of every dollar owing, but unpaid, as a dollar with a question mark beside it.

2. Don’t assume your clients are financially viable.

Be on the look out for red flags with respect to your customers and be aggressive about which clients you are willing to be exposed to and for how long.

Ask for information about how a project is financed and whether there are any financing issues on the project.

Don’t be lulled into complacency by glib assurances of eventual payment.

3. Don’t lose your lien rights.

While it is always important to be aware of your statutory right of lien, in this environment, it is even more critical.

A lien secures amounts owed to you by attaching your claim to whatever equity is in the property.

If the developer or general contractor goes under, a lien may be your only recourse.

Be aware of timing issues with respect to the recent projects that have been suspended.

The B.C. Lien Act deems a construction project to be abandoned 30 days after the cessation of work.

Accordingly, the 45 day lien period will likely commence running 30 days after a project has been suspended.

4. Remember labour and material payments bonds.

These bonds are effectively a guarantee from a bonding company that the trades, one step down the contractual chain, will be paid to the penal limit of the bond.

These bonds tend to be largely forgotten during boom times, but re-emerge as significant recovery tools with market corrections.

5. Read your contracts.

In good times, contracts too often seem like a formality.

In more challenging times, they can mean the difference between success and failure on a project.

Look at what you have on your current projects and be more careful on what you agree to in the times ahead.

6. Carefully analyze your costs.

Business has been so good for so long that the cost side of the business equation may not have been carefully looked at for a long time. Now is a good time to review your overhead and consider cutting those costs that are not adding value to your bottom line.

7. Stay positive.

It’s not exactly breaking news that the construction industry is a cyclical one.

More importantly, we all know that there are opportunities in every market.

By going back and honing some of your basic business skills, you can position your company to not only weather the current conditions, but alo emerge from this downturn even stronger.

Norm Streu is Executive Vice-President and General Counsel of the LMS Reinforcing Steel Group and former chair of the Vancouver Regional Construction Association. Chris Hirst is a partner and the leader of the Construction & Engineering Group, Alexander Holburn Beaudin & Lang LLP.

Email questions or comments to editor@journalofcommerce.com.

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