The most popular excuse I hear every week as to why builders are not paying their bills is “I’m waiting on a draw.” It is an excuse I'm hearing more often, and not only for balances of $10,000 or more, but even for balances as small as a couple of hundred bucks. Surprisingly, builders of all sizes are using the “I’m waiting on a draw” excuse, which indicates that cash is still tight for many builders who have not recovered from the Great Recession.
Even many of the large commercial construction contractors are living off draws as “pay when paid” clauses are added in just about every contract presented these days. Some commercial contractors continue to bid projects too low, and getting paid at the end of the job is always a negotiation. Plus, a vast majority of both commercial and residential contractors look for reasons, whether real or imaginary, to either not pay their bills or to have them reduced. These trends tell me that most of those companies do not have the financial ability to withstand any loss.
A recent indictment of a large Florida contractor, who knowingly committed fraud, has exposed a sense of desperation in businesses at all levels. There is little doubt that other companies operated similarly and are now in legal peril. Indications are that suppliers and subcontractors who fail to properly protect their lien rights will lose millions of dollars. This is yet another troublesome sign for the construction industry.
On the dealer side of the fence, many in the industry believe the continued consolidation of independent dealers is driven more by economic necessity rather than opportunity. The main anecdotal reason why I think most of the companies being purchased are at fire-sale prices is because, unlike the boom time a decade ago, I don’t hear the sellers brag about their huge paydays. Instead, you hear things like “they just wanted to get out” or “they were tired of fighting it.”
The signs throughout the construction industry suggest that many companies are still hung over from the Great Recession. Most have little to no cash reserves, they don’t have the resources to handle growth, and most realize they are one bad job or unexpected loss away from disaster. I think more than a third of the companies in the construction industry are functionally bankrupt and looking for a way out. It appears many of these companies do not have the will or wherewithal to withstand another economic slowdown. Considering the current shape of the world economy, that is an alarming concern.
Each week since 2007, typically on a Friday morning, our management team goes through a detailed accounts receivable review of all past-due balances to ensure appropriate, aggressive collection measures are taken. Given our location in Florida—a poster child for the housing collapse—there is little doubt these collection efforts have saved the company hundreds of thousands of dollars in credit write-offs since the Great Recession. Some six years later, I see few signs that give me comfort that collections are getting easier. In fact, in some cases they are getting worse as some builders take their scant profits to rebuild personal wealth instead of cash flowing it back into their businesses.
Executives should understand their company’s accounts receivable exposure and manage their risks accordingly. Do not ignore the warning signs; put a mechanism in place where past due balances are reviewed weekly. Market conditions and the health of the construction industry are not as good as you may think.
Editor's Note: For more on this subject, see ProSales' Jan. 19 story "Delinquency Rates Rose at Dealers Nationwide in 2015"