While the precise impact of a recession on our construction sector is unknown it will no doubt affect many small businesses as less work is pushed through the pipeline. For savvy business owners there are options to help both reduce risk to their own profitability and give greater confidence to potential customers.
Customers Need Greater Peace of Mind in Uncertain Times
Even in a buoyant economy putting down $500k on a new house, or even $50k on a renovation, is a serious investment for most people. And consumers feel even more nervous and big spending decisions in a recession. We know that many have already decided to hold off on their planned projects until things settle down. So, any extra reassurance you can give them that their money will be safe with you is going to help get them over the line.
Put Deposits & Milestone Payments in Escrow – And Promote This As A Benefit
While it can be tempting to put a customer’s deposit towards the set up costs for a project, it is generally not for this purpose (other payments can be scheduled for these costs). It is certainly not there to pay overheads or bills from a previous project! Deposits should be held over and returned to the customer on completion of the job or, if agreed in the contract, used to offset final payments.
One simple way to give confidence to your customer is to hold their deposit in escrow. This means the money is paid into an independent account, usually a lawyer’s trust account, and can only be drawn down when both parties agree. Any dispute would be resolved via the dispute mechanism within your contract.
The same approach can be taken for all milestone payments.
There is a small cost to using an escrow service, but this can be built into your price. Look at it as an investment to win business from nervous clients who otherwise may not have gone ahead. It can also be used in your marketing.
Don’t Take Advance Payments
Structuring your staged payments so that you’re only taking money for completed work is another way to give confidence to clients. And with banks exercising greater control than ever over contractual milestone payments this is already par for the course in many cases. Builders can turn this approach into a positive marketing message, even for homeowners who aren’t reliant on bank finance.
While both of the above options can create risk to the builder, who will need to cashflow each stage themselves, the number and frequency of payment milestones can be structured around credit terms with subbies and merchants, so that there is rarely an issue with the builder being too far out in front of the job.
Provide An Independent Guarantee
At Builtin, one of the most important checks we do on builders wanting to offer our guarantee is a financial solvency assessment. In these uncertain economic times this shows potential clients that their builder, if they are accredited with Builtin, has been rigorously assessed and found to meet a high standard for financial solvency. It indicates to them the builder is in a strong position to work through the challenges an economic downturn may bring.
Builtin’s Accredited Builders can then provide their clients with an independent guarantee that their building work will be completed at the agreed price. If something unforeseen does happen the homeowner can call up their guarantee and another builder will be appointed to finish the project. That peace of mind could be the difference between someone deciding to build now or wait, or to choose one builder over another.
The Master Build Guarantee is another well known example of this type of cover, with this and Builtin’s the only two currently available in New Zealand. To offer clients an independent guarantee builders must apply, be assessed and accepted by one of these two organisations.
Builders, Apply For Accreditation Today
You Also Need To Protect Yourself
If you subcontract to a larger firm you also face a financial risk if they (or the project principal) gets into difficulty. There are a number of options to help subbies lower their risk too.
Surety Bonds Instead of Bank Bonds
If a contractor is required by their principal or head contractor to supply a bond your bank will typically require you to hold an amount equal to the bond in cash. That’s money you might not have or might need to support your business over the next 12 months. And if it’s structured in the form of an overdraft you’ll be paying through the nose for the privilege too. But without the bond you can’t win the contract.
A surety bond is an alternative to a bank bond and is backed by an insurance company or specialist bond provider instead. You pay a fee, typically a percentage of the bond value, to purchase the bond. This means your cash isn’t tied up and you’re not having to pay interest on an overdraft, which can make a surety bond a cheaper alternative as well.
A Retention Bond Instead of Retentions
Changes to the Construction Contracts Act were designed to improve protections for subbies’ retentions. However, we’ve seen from the Ebert case that this hasn’t necessarily worked. If your head contractor or principal is asking to hold retentions you may want to provide a bond instead. The main benefit of a bond here is that your retentions would not be at risk if the head contractor or principal gets into trouble.
During the lockdown Kainga Ora (Housing New Zealand) returned retentions to some builders and removed the requirement to hold them from others. Whether this will continue is uncertain. Their willingness to accept surety bonds instead of bank bonds has also been a topic of recent conversation.
In a Nutshell
In times of economic uncertainty managing risk is even more important than normal. This is because it both reassures customers and protects your own bottom line. Bonds and guarantees are a smart, cost effective way to do both.