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Construction & Design Views

Construction Survival: What to do when clients stop paying your invoices

By Barry B. LePatner, Esq.

It is months now into the Covid-19 pandemic. You are the principal of an architectural, engineering, or construction firm. You may be a supplier, vendor, or trucker that provides products and materials for many construction projects.

In every one of these businesses, a look down at your accounts receivable reveals that many of your clients have chosen — or been forced — to defer paying for your outstanding invoices.

The lack of fresh funds to run your business is jeopardizing both the principals of your firm and the loyal employees who continue to work from home.

BARRY LePATNER

What are the implications for your business if this cash shortfall continues for a few more weeks or the next two months? What steps can\must you take to reverse this course of events?

Before we get to the direct responses to these important questions, it is important to recognize that most small- to medium-sized real estate, design, and construction businesses have several things in common: (1) they are not well capitalized and operate their businesses anticipating a regular course of collections each month to pay staff and all other operating expenses; (2) there is little recourse to borrowing beyond their existing lines of credit and the shortfall in current and future collections will give pause to lenders to extend more credit; and (3) furloughing and\or dismissing employees risks problems in future staffing were the current moratorium on construction to end in the very near future.

Through no fault of their own, many of these firms will be unable to stay operational without governmental assistance. However, as currently structured, the recent laws put into effect by Congress will not meet the full impact of the losses to be incurred if the moratorium, as all expert health officials indicate, proceeds into the summer months.

Critical Steps to Business Survival

To help ensure your business remains operational until the moratorium is lifted and clients and their projects recommence work, you should be actively taking the following measures:

  • Stay in constant communication with the principals of your clients. Everything in the real estate and construction world is based on personal relationships. Enduring this crisis will depend on you understanding this precept.
  • Emphasize to your clients during these discussions that:
    • You highly value their business;
    • You have always been there for them during the course of your relationship;
    • You want to be ready to service their projects or interests immediately upon notice that work is to recommence;
    • Payment by your client of the outstanding invoices is essential for you to stay in business so that your team can be kept together during these difficult times and be there when your client will most need them; and
    • Repeat these points both orally and in writing.
  • Possible responses to these efforts will likely include:
    • “We don’t presently have the funds to pay you.”
    • “We value your services and will continue to keep you current as you provide your services;
    • “We are all in the same circumstances and when we can pay you, we will.”
    • “Don’t call, we will get back to you at a later date.”
  • You should become familiar with all financial assistance programs being offered to small- and medium-sized businesses. The Small Business Association has emergency loan assistance programs for firms in distress. All firms should consider applying for the recently-enacted assistance loans, part of which may be forgiven in return for keeping workers on your staff for several months.

When payment is not forthcoming, you will need to decide how you will respond. In some circumstances, where the client is truly unable to pay you, you should turn to your contract and identify all the remedies at your disposal.

These include, among others, pursuing mechanics lien claims, terminating the contract, or pursuing legal action. The latter is costly, will certainly end the relationship with that client, and will most certainly only serve to “kick the can down the proverbial road” for years to come. This is why maintaining an excellent relationship with each client, acknowledging their circumstances but urging recognition of your distress, is critical.

Keep in mind that once the Covid-19 emergency is over, it will be time to renew those relationships that are the lifeblood of the industry. Good clients will work with you to see you through these difficult times if you remain in close communication.

Having taken the constructive steps described above will enable each firm to maximize its chances of keeping a steady cash flow during the crisis and will strengthen the relationship once business returns to the new normal.

Barry B. LePatner, Esq., is the Founder of LePatner & Associates LLP, and the CEO of Insights+ LLC

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