Construction Factoring – Building the Right Foundation Despite the Unique Challenges

By Scott Applegate

The outlook for tScott_CapitalPlushe U.S. commercial construction industry is positive, according to a new report from Jones Lang LaSalle (JLL), after a tough recession in 2009 that brought the sector to a virtual standstill. Spending on nonresidential building construction has been strong in the first quarter of 2014 despite the tough weather.

Ken Simonson, chief economist with the Associated General Contractors of America estimates 4% to 8% growth in 2014 nonresidential construction, lead by 10% or more jumps in the power, manufacturing and lodging construction subsectors. While he forecasts up to 5% drops in highway and street and education spending, he anticipates a 2% to 5% increase in transportation construction, and up to 5% increases in commercial and office construction.

Factoring and the construction industry
Factoring brings different challenges for different industries with some being trickier than others. The construction industry is definitely one of those industries with more unique differences and can be much more labor intensive when it comes to due diligence.

Some of the unique challenges involved with factoring to construction customers include:

• Lien releases – in acknowledgement of receipt of payment, subcontractors must execute and provide lien releases for themselves as well as any materialsmen or subtrades they have used on a particular job.
• Lien laws – lien laws are different in each state and are continuously changing.
• Contract terms – construction contracts often include terms such as “paid when paid” and “paid if paid”.
• Progress payments – for larger/longer jobs, most contractors are required to bill as they progress throughout the project and reach certain milestones.
• Retainage – most general contractors will withhold 5-10% from each billing until the entire project has been completed.

The contract terms make the construction industry a bit more challenging to work with than others such as staffing and transportation. For example, the paid when paid contract term often extends the payment terms of invoices 45 or 60 days. The progress payment stipulation can often be subject to personal interpretation of the work that has been accomplished and the total scope of the project. Often times this clause can create disputes between the parties about the percentage that has been completed.

There are often multiple levels of approvals for the work a contractor does and the invoices that are submitted. This often means that items have to be approved by the general contractor, architect and then the owner delaying the payment process and providing multiple opportunities for disputes.

What this means to factoring companies
With construction spending for February 2014 at over $942.5 million* and nonresidential construction 6.4% above the same month in 2013 on strength of the commercial/industrial subsector, you are sure to come across a construction company looking for working capital assistance at some point. If you can’t provide the working capital they are in need of, it is often beneficial to partner with a factoring company who specializes in construction when presented with a construction client. To truly create a mutually beneficial alliance, it is important to find a partner that has a complimentary industry focus so you can ensure your customers get what they need and companies who focus on the construction industry are out there to help you help your customers.

Author: Scott Applegate is COO at CapitalPlus Equity, a factoring company assisting construction companies with their cash flow needs. For more information on CapitalPlus Equity visit www.capitalplus.com. Scott can be reached at (865) 670-2345 or applegate@capitalplus.com.

* According to the United States Census Bureau

 

 

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