by Quenda Behler
My husband, my brother-in-law, and I were sitting around
reminiscing about construction slowdowns we've been through.
(What can I say? We're old.) My brother-in-law talked about the
'70s, when to avoid laying off his crew he sent them to his
mother's house to paint. He was hoping that by the time they
finished he'd have some other jobs lined up. Instead, he wound
up sending them to the homes of his mother's friends,
My husband talked about 1991, when he loaned a truck to a
friend running for office, who needed it for putting up
campaign signs. At least that way the truck was on the road,
where potential customers could see the company's name printed
on the side. Otherwise, it just sat in the driveway —
business was that bad.
It's a painful truth: Sooner or later every construction
company goes through hard times. And when that happens, you
can't get away with the things you could when times were good.
Here are some of the problems you have to watch out for when
business is slow.
The first is reduced cash flow, especially when tax payments
come due. If you don't have the cash to make your
self-employment payments, you might be able to work something
out with the IRS — or maybe you'll just clench your
teeth and pay those mafia-style penalties and interest. I don't
recommend it, but sometimes there are no other options.
Withholding. But here's what you absolutely
do not want to do: be late sending in your employees'
withholding. This is not your money; it's money held back from
employees to pay their taxes — so the IRS will not be
interested in letting you work something out. If you don't pay,
the agency can freeze your bank accounts or show up on the job
site and shut you down. You could also be charged with a crime.
So even if you have to borrow money to do so, pay that
Payment schedule. Poor cash flow can be
especially hard to avoid in states that limit the amount of
cash contractors can collect before doing the work. I'm all in
favor of protecting consumers, but you should not finance jobs
for customers by paying for their materials yourself. When you
do that, you're essentially loaning them money — and
you're not a financier. So when you write contracts, schedule
payments carefully. In states where it's allowed, you can tie
payments to particular events — after materials are
ordered, after the permits are in place, and then upon various
milestones, such as when you start the foundation, when you
start drywall, and so forth.
If you don't want to demand payments at the beginning of
tasks, make them due as items are completed.
When business is slow you're more likely to underbid.
Naturally you want to keep working — but remember,
there's a big difference between working without your usual
profit margin and losing money on jobs.
Contract clauses. It's important to protect yourself
with clauses about unexpected cost escalations and hidden
conditions: When you're bidding low, your margin for error is
very small. The clauses don't have to be elaborate. To address
cost changes, say something like this: "The offered price is
dependent upon current market prices. Unexpected increases in
the present market rate for labor or the present market rate
for materials will be reflected in price adjustments." For
hidden conditions, use the following: "The cost of conditions
on the site that could not be revealed upon ordinary
inspection, and that impact the cost of the job, will be
reflected in price adjustments."
When employment is down there's even more competition than
usual from fly-by-nighters with a pickup and a hammer. Explain
to prospects why hiring an unlicensed person to fix their roof
or wire their house is a bad idea. Talk about fires, leaks,
liability, and the like. Share stories about owners who wound
up spending more because the work wasn't done right the first
time. Remind customers that with unlicensed contractors it's
hard to get warranty work done, and licensing authorities can't
help with disputes. And tell them they can forget suing one of
those guys — because even if they can find him, he
probably won't be collectible. Unlicensed contractors typically
don't carry insurance, which means the customers could end up
getting sued for problems he caused.
When the economy falters, you're bound to have more trouble
collecting, and not just from people who have lost their jobs.
A certain kind of customer seems to come out of the woodwork
— the kind who signs a contract and then decides he's
entitled to a better deal, or who delays paying just because he
You need a well-written contract to protect yourself, one that
spells out the circumstances under which you could walk off the
job — when you've given notice it's time for a payment
but haven't received it, for instance. Never let yourself get
to the end of the job with the customer still owing you a lot
Use contract language that says something along these lines:
"Payment is due within seven days [or however many you want]
upon completion of [whatever milestone you're talking about].
If payment is not received as required, the contractor, at the
contractor's option, may cease further work until the payment
is received. If required payment is not made within [this is
where you insert your drop-dead date] the contractor, at the
contractor's option, may treat the contract as breached."
Be sure to include the "at the contractor's option" language.
Even if you don't want to treat every late payment as a breach
of contract, you shouldn't give up the right to do so
— which is what can happen when you don't enforce
these late-payment penalties.
Here's the most useful advice I can offer about hard times:
Don't be careless. In the past you may not have been very
businesslike; you were making too much money to waste time
counting pennies. But now you can't afford to make mistakes.
It's time to get those computer programs that track costs up
and running, and to attend those conferences and association
meetings where you learn how to be a good businessperson. The
survival of your company may depend on it.
Quenda Behler Story has practiced and
taught law for more than 25 years.