Financial risk is a part of doing business in every sector. That’s why practically every company out there buys insurance to cover its bottom line. Risks for most businesses are small. But in some industries, like construction, they’re enormous. The construction business is dominated by long payment schedules and costly projects. Little hiccups can result in massive losses for both parties involved. One of the biggest problems occurs when construction companies fail to charge their clients enough for projects. As the project wears on, the construction company starts to make losses. And ultimately, they can decide that the whole enterprise just isn’t worth it. So what can companies do to reduce their financial risk?
Contract And Credit Agreements
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commons.wikimedia.orgThe most important aspect of any construction contract is the initial credit agreement. Often the fate of a construction company has already been sealed once it signs the contract with the creditor. Sometimes, construction companies and lenders will conspire to shift risk onto their contractors. They’ll insert language that makes the contractor more liable when things go wrong.
As a result, contractors should be wary of the level of risk built into the original contract. Check the provisions and the language to make sure you’re not swimming with sharks. Also, make sure that if you sign an agreement that it is an actual credit agreement with the customer. Don’t sign a “trade agreement” with the suppliers. The protections are not the same.
Credit Checks And Monitoring
Like it or not, the construction industry relies on credit. In industry jargon, this is called “trade credit.” The supplier of, say, rig mats, extends credit to construction firm planning to use them. Then the construction firm lends credit to the customer until the customer pays for the work done. As a result, companies in the construction business are always chasing their next payment. They’re rarely paid up front.
This means that construction bosses need to be clear on their customer’s ability to pay. If a client can’t pay, the construction company won’t get paid, and the effects can go up the chain. The best way to check whether a customer can pay is to do a credit review. Check their credit score periodically, making sure that their financial circumstances haven’t changed.
Beware Joint Check Agreements
If your customer doesn’t have a lot of money in the bank, it can spell disaster for the project as a whole. There’s a gap between the money the customer has, and the amount they need to get the job done. Of course, if the customer doesn’t have enough money, the construction company will be unwilling to carry on with the work.
This is where joint check agreements come in. Here, some third party lender covers the gap between what the customer has and what the builder wants. The customer agrees to pay back the third party at a later date. And the company gets the money it needs to restart construction. But be wary: the joint check industry is full of fraud and scams. You may be targeted. And you may lose a lot of money.
