Liens and Bonds: A Practical Approach
It's currently a bleak world out there in the construction sector. Contractors, suppliers and materialmen have all shed considerable portions of their workforce over the last year as the credit crisis leeched hope and confidence out of the economy. For construction-oriented credit managers, the current financial environment has taken an already challenging credit sector and made it even more so.
"When we came to the end of 2008, we were living in a different world," said Greg Powelson, president, NACM's Mechanic's Lien and Bond Services (MLBS) during the super-sized teleconference, "Liens and Bonds: A Practical Approach." "How we looked at our customers, and how we looked at our business, needed to change. Things have really changed over the last couple months and I think we need to really look differently at how we extend credit."
Suppliers have been dogged by shrinking profit margins over the last couple years, further weighing on a sector whose mantra has typically been, "I can't pay you, until I get paid." For credit managers, as their customers' margins have continued to vaporize, maintaining the integrity of their A/R has been transformed into an increasingly greater trial.
"They meant it when they said it a year and a half ago, and they meant it last year when they said it, but twice as much," said Powelson. "Your customers' margins have typically shrunk by half over the last year to 18 months. As their margins have continued to decrease, what we're finding is that a lot of your customers out there are actually taking jobs at net break-even and then back charging profitability."
From Powelson's perspective, there are two ways to deal with this. Either credit managers have to adopt a firm tact or they can do what most construction-oriented credit professionals doâ€”particularly manufacturers and distributors selling to sub-tier contractorsâ€”and that's recognize that these suppliers really can't pay until they get paid. Payment cycles in construction-oriented credit are almost always going to get extended, especially with the number of players making up the ladder of supply.
"We all know the outside factors that are affecting credit now are unprecedented," said Powelson. "We need to recognize that construction credit is unique and why we need to be looking at liens and bonds in the first place. Maybe most importantly, there must be the recognition that in a construction-oriented environment you are typically going to be asked to extend lines of credit that are greater than the net worth of your customers."
Powelson explained that because of the uniqueness of construction credit and the fact that everyone in the sector is struggling, creditors need to start figuring out how other economic factors are going to impact their ability to get paid. If fuel costs spike, like gasoline for instance, that needs to be included into the equation for a credit manager's decision to approve credit. In terms of recovering payments, credit managers who sell nationally need to be aware that they are not merely filing notices in states where it is the easiest, such as California, Texas and Florida, but that they are filing the most notices in the states that represent the greatest risks.
"I have always felt that a good policy on liens and bonds should be based on risk, not on the ease of serving a preliminary notice," said Powelson. "A notice of intent to lien in Massachusetts is a pain in the neck, but if you have credit risk there, you need to figure out how to get it done as well."
As usual, he also said that credit managers need to be aware of their notice filing deadlines in every state that they are doing business in, as well as where in the supply ladder they fall. He stressed simple remedies, like spending a few hours and a few hundred dollars to have a good lawyer review contract forms and work on developing better ones, are things that will pay many times over in returns.
Services like MLBS' Lien Navigator also become more imperative in assisting credit professionals in their management of filing deadlines and the variety of lien law differences from state-to-state as the economy continues to sputter.
Matthew Carr, NACM staff writer