How to reduce financial risk

1. LEAN ON LIEN RIGHTS

The mechanics lien remedy was invented for the explicit purpose of protecting contractors
and suppliers against all financial risk on a project. In theory, if mechanics lien rights are
properly used, those furnishing labor or material to a construction project could be as secure
against non-payment as a bank. The question, therefore, is why wouldn’t every company in
the world use these rights?

In reality, the mechanics lien remedy is relied upon by a lot of companies. It is common for
large successful enterprise organizations to protect their lien rights on absolutely every
project. (See: preliminary notice on every projects These rights sometimes get a sour
reputation in the industry causing contractors and suppliers to fear the remedy. The fear is
misplaced, however, as lien protection and compliance is a fact of business in the industry.
Savvy companies understand this, and they lean on their mechanics lien rights to insulate
them from financial risk.

2. CONTRACT AND CREDIT AGREEMENTS

All financial risk roads lead back to the and/or the credit application. When a company steps
foot onto a construction project to begin furnishing, its fate has usually already been sealed
by what choices have been made during the contracting stage of the relationship.

Formal contract , whereby the property owner and general contractors insert provisions and
language to shift the financial risk of the project onto unsuspecting subcontractors and
suppliers. And further, those suppliers who issue trade credit without getting a quality credit
agreement with the customer are swimming with sharks.

3. CREDIT CHECKS AND MONITORING

Anyone furnishing labor or materials to a construction project is furnishing on credit.

Suppliers typically call this “trade credit,” and the parlance does not carry over to contractors
and subcontractors. However, it should. Contractors and subcontractors, like suppliers,
furnish their labor and materials to the property developers and then wait for payment. Pay
applications are always seeking compensation for work completed.

Regardless of role, the construction industry runs on credit, and because of this, it is critical
to have strong credit practices. Check a customer’s credit at the beginning of the relationship,
and then monitor it throughout. It’s very important that the customer have the ability to pay.
It’s even more important that a company knows about its customer’s ability.
4. JOINT CHECK AGREEMENTS

Joint check agreements are just one example of “credit gap” tools available to those in the
construction industry. A credit gap exists when the customer is without the means (or without
the formal credit) to justify the company’s risk in furnishing or continue to furnish to that
customer. Companies can fill the “gap” between what they are willing to do and the
customer’s ability with a credit gap tool like the joint check agreement.

A joint check agreement is a tool frequently used in the construction industry for these
purposes, which obligates some third parties (usually the general contractor or property
owner) to pay the company directly or with a joint check to the company and its customer.
The company skips over the customer and relies on the credit of some other, more stable
company. Beware, however, of dangerous joint check Other credit gap tools include the
personal guaranty, letter of credit, and UCC filing.

5. CONSISTENCY

This final risk reduction method is not only the easiest and cheapest to employ, but it is also
the most important. Consistency in efforts will breed consistency in results, and
unfortunately, accounts sometimes go unpaid simply because a company doesn’t have a
consistent commitment to a method of signing new customers and following up with them for
payment–or, worse yet, no method of doing so.