MANAGING CONSTRUCTION RECEIVABLES
The law firm of Christie Saccucci Matthews provides quality representation and advice to clients in the construction industry. As a founder of the firm, Frederick J. Matthews can provide you with the insight and advice that comes with decades of experience handling issues involving construction receivables.
Tips for Managing Construction Receivables
1. Know your customer. Keep in touch. Informally monitor business progress.
2. Consider using a credit bureau such as Lumberman's to assess customers (new or periodically in relationship).
3. For new customers, get a credit application that may include the following:
- Proper full name of customer
- Is customer incorporated? If so, names and addresses of officers and directors.
- If unincorporated, names and addresses of proprietors
- Address of business
- Nature of business and length of time in business (of the entity applying for credit, not a predecessor)
- Name of bank and branch address
4a. Consider obtaining third-party guarantees (i.e. personal guarantee of a principal of the customer) or other collateral.
4b. Some projects have Labour and Material Payment Bonds, which protect project suppliers by guaranteeing payment for work or materials supplied to the bonded principal, typically the general contractor. Check to see if your customer is bonded. Claiming against the bonding company may ensure full payment. There are notice requirements and time limits however.
5. Consider checking the owner of the project from a credit point of view or at least a sub search to determine if the indicated project owner is the registered owner of the land where the project is located, whether the land is mortgaged, and whether there is evidence that construction financing arrangements are in place.
6. Monitor payment patterns. Stay conscious of lien rights (i.e. any time the last activity on the job or last delivery to the site passes 30 days (45-day time limit to lien)). The concern is less if you know you are going to be asked to deliver more material and/or you know you are going to be called back to do further completion work, which will keep lien rights alive for another 45 days from last work or supply (subject to substantial completion of the project).
7. Consider getting the customer to give a direction to the owner, or trade above your customer to permit it to make direct payment to your account out of the next draw.
8a. If in doubt about the account, particularly if a subcontractor or suppler not dealing directly with the project owner, give consideration to exercising lien rights, particularly for accounts over $25,000 and maybe some that are smaller. Exercising lien rights does not win friends, but this can be softened with a polite advance warning and an assurance that prompt removal can be assured in exchange for a fair resolution. Liens can always be removed quickly. Lien claimants are entitled to payment before other creditors, including creditors of the same project who have not filed liens. They also give you a bargaining position with Revenue Canada if it becomes involved as a project creditor. Revenue Canada typically claims priority but may offer compromises to lien claimants
8b. Recognize that certain money is protected only for lien claimants. As against lien claimants, the 10 percent holdback cannot be reduced by set-offs for deficiency claims or back charges.
9. Make sure you get written documentation on extras — a memo acknowledging the extra and the compensation entitlement.
10. Make sure, particularly for material suppliers, that the project identity and location is included on billing documents so that there is no doubt which project you supplied and may be looking to for payment. The ability to exercise lien or trace project funds (trust claim) may depend on it.
11. Recognize that, independent of lien rights, you are a trust beneficiary of project funds through the system. Simply stated, your customer may not use project funds until all its obligations for work and materials to the project have been paid for. Just as importantly, the persons in charge of the customer are personally liable for funds used in contravention of this trust obligation. Basically, they are obligated to account for the funds received or risk personal liability. Misdirected funds may also be traced.
12. Separate the credit approval function from the sales function. The motives are different. Credit personnel should ensure that the salesman gets credit particulars, including the name of project to which goods are supplied, especially on pickup orders.
13. Establish a working relationship with a lawyer who is knowledgeable in the area. Once you get to know each other, any necessary process can be streamlined and options specific to the particular situation can be considered efficiently.