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Happy Halloween

October 31, 2018 Uncategorized 0 Comments

  Well, it is officially that time:  If you haven’t already, today’s the day to make a run to the

construction finance halloween

 

Well, it is officially that time:  If you haven’t already, today’s the day to make a run to the store and buy enough candy to make any dentist cringe.

Then, depending on what your willpower is like, feel free to turn off the porch light and keep all of those Hershey’s bars for yourself.

On behalf of all of us at Construction Finance, we hope you have a safe and happy Halloween.

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Alternative Lending in the Construction Industry

October 23, 2018 Uncategorized 0 Comments

Generally, when people think of construction lending, they think of the obvious: Banks. After all, in pretty much every sector

Construction Finance alternative lending

Generally, when people think of construction lending, they think of the obvious: Banks.

After all, in pretty much every sector of the economy, banks provide the flagship product:  The traditional line of credit.

There’s no denying that the bank LOC has some definite advantages–namely, price.

While alternative lending varies with regards to fees and interest rates, virtually every product on the market is going to be more expensive than a conventional credit line from the local bank.

However, for contractors, these low rates are both a blessing and a curse: On one hand, a bank loan is cheap.  On the other hand, bank loans are cheap for a reason…with their strict underwriting requirements, banks generally can only lend on the very cleanest, most secure deals.  For someone who’s been in business 20 years, has significant assets, great credit, and a variety of solid account debtors, that may not be a problem, but for everyone else, it can present a real hurdle.

On top of that, in order to guarantee their security, banks often over-collateralize–it’s not uncommon for a $400k line of credit to be secured by $700k in assets, plus $400k in receivables.  This requires not only significant assets, but creates the risk to a business owner of significant loss in the event of default.

It’s due to these drawbacks that some businesses turn to alternative lending sources.

While alternative lenders are more expensive, they’re able to offer flexibility that banks cannot. Additionally, depending on the type of product, some alternative lenders offer a level of value that is comparable to a bank line of credit. Below is a brief overview of the types of alternative lenders that exist in the construction sector, as well their benefits and drawbacks:

  • Mobilization Funding

Starting a project takes money.  Just getting to that first draw on a job can mean several weeks, if not months of payroll, as well as liability insurance, materials, and the costs of getting everything to the jobsite.  Companies that specialize in mobilization funding aim to solve this problem by advancing contractors the money they need upfront to begin the job.

Benefits–Gets the client the money they need to start the job.  Generally cheaper than a Merchant Cash Advance (MCA).

Drawbacks–High interest rates.

  • Factoring

Particularly in commercial construction, getting to the first draw on a job is only half the battle–once an invoice has been submitted, the property owner has to wait for the bank to release payment in order to pay the general contractor, and the general contractor then has to wait until they’ve received the money in order to pay their subcontractors.  For a subcontractor, this means payment can often take up to 90 days after the submission of that initial invoice….which, in turn, means another 90 days of floating the cost of payroll, materials, insurance, and overhead. Factoring works by advancing the contractor a percentage of their open pay app, giving them money which can then be used to keep things running while they wait to be paid by the owner.

Benefits–Aside from government backed SBA loans, this is generally one of the cheapest forms of alternative lending. Also, because so much of a factor’s security comes from the strength of the account debtors, a good factor will steer the client away from jobs that are unlikely to pay.

Drawbacks–Paperwork and red tape.  Though getting funding through a factor is still faster than obtaining a bank LOC, there does tend to be a bit of underwriting and paperwork involved.

  • SBA Loan

Recognizing that a conventional credit line may be unobtainable for many small businesses, even those with reasonable credit and assets, the government has stepped in and offered to back specialized loans intended to help small companies grow.  SBA loans can go up to $5M, and offer rates comparable to that of a normal line of credit.

Benefits–Cost

Drawbacks–Extensive underwriting.  Lots of paperwork.  Limited flexibility.  Much like the traditional line of credit, these loans can be quite difficult to attain, particularly for borrowers with past credit issues.

  • Merchant Cash Advance

A Merchant Cash Advance is generally the last resort for those in search of business financing.  On one hand, these advances are easy to obtain, and the underwriting process is near-instantaneous, allowing applicants to get the money the same day they apply. On the other hand, the fees are exorbitant, often exceeding 200% APR.  As such, these are essentially the PayDay Loans of commercial finance, complete with all of the problems normally associated with that industry.

Benefits–Simplicity

Drawbacks–Extremely high fees

While none of these alternative sources of lending will ever replace the conventional line of credit, they do provide useful avenues for those times when a traditional credit line just isn’t a good fit. In addition, particularly with services such as factoring, it doesn’t have to be an either/or arrangement:  A client may benefit from working with both a factor and a traditional bank, in order to get the flexibility needed without paying higher fees than necessary. Such arrangements can be beneficial for all, since such a partnership may also provide greater financial protection for both the bank and factor.

 

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Today’s Useless Fact: The First Skyscraper

October 18, 2018 Uncategorized 0 Comments

When you enjoy useless information as much as I do (See: History of Indoor Plumbing), you realize that telling people

Construction Finance

When you enjoy useless information as much as I do (See: History of Indoor Plumbing), you realize that telling people about one pointless thing just isn’t enough.

After all, the world is filled with cool knowledge!  Why keep it all to yourself?

For today’s topic that probably won’t actually help anyone get ahead in life (but that’s fun to know about regardless), I’d like to talk about skyscrapers.

Now first of all, full disclosure:  I love skyscrapers! I’m trapped in the delta flatlands here. If it weren’t for tall buildings, I’d never get to see the world from a vantage point that’s higher than five feet off the ground. Realistically, planes and high-rises are pretty much my only opportunity do anything other than stand eye-level with rice fields.

However, as some of you are probably too aware, skyscrapers are pretty complicated to build.

………..

Creating a regular building is a complicated feat that involves teams of architects, engineers, and multiple construction crews, as well as months (if not years) of time and millions of dollars.  A skyscraper involves all of those things, times a zillion.

As such, there’s a reason that these massive structures are a pretty new innovation–if you would have told your great great great grandparents that people would live in 20 story buildings, they would have thought you were insane!

………

It turns out, the world’s first skyscraper was erected in 1884.

Built in Chicago’s business district, the Home Insurance Building stood ten stories tall, towering over the midwestern skyline.  Next to the two and three story wood-frame buildings nearby, the Home Insurance Building had to have looked like something from a science fiction movie…had movies existed at the time.

To support the structure, architects had to design a steel frame to support the incredible weight of the building.  We take this for granted today, but at the time, nobody had ever imagined using anything but wood to frame a structure.  Implementing this new frame had to have been an incredible feat for both the engineers and the construction crews on that ground; the weight and magnitude surpassing anything they’d ever worked with before.

Now, by today’s standards, this was ultimately an unimpressive building.  My old college dorm was seven stories…and that was in the middle of the southern delta, surrounded by cotton fields just a couple of miles away. Ten story brick buildings are a dime a dozen, housing everything from college kids playing beer pong to call centers and doctors offices.  In 1884, however, this was the tallest building in the world; a proud testament to the wonders of American innovation and midwestern work ethic.

……….

Unfortunately for historic preservation nerds like myself, the innovation of this building was indeed soon forgotten.  Within a few years, bigger, better buildings popped up all over the country, towering even closer to the heavens.  Less than 50 years later, in 1931, the building was demolished by people who no longer saw much grandeur in a building that only stood 10 stories tall.

The work by architects like William LeBaron Jenney (the architect behind this structure), however, still lives on.  Those same engineering and construction methods that made the Home Insurance Building possible would later pave the way for the way for all of the gleaming, thirty floor glass towers we take for granted today.

 

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Keep Disaster Recovery From Turning Into a Bigger Disaster

October 12, 2018 Uncategorized 0 Comments

At the risk of stating the obvious, we are now well into fall.  The leaves are turning, the days are

At the risk of stating the obvious, we are now well into fall.  The leaves are turning, the days are getting shorter, the PSL is back, and here at the office, my trademark flip flops have given way to fleece layered over more fleece.

Unfortunately, for those along the coasts, fall means more than just Patagonia and pumpkin flavored everything…it also means hurricane season.

Just as the Carolinas are trying to recover from Hurricane Florence, the Florida panhandle is looking at the wreck of Michael’s wrath…and we’ve still got time left in the season.

……………

With regards to construction, hurricanes are always a mixed bag.

On one hand, they’re personally devastating, but on the other, they mean plenty of new opportunities for work. As Bruce Springsteen once sang, ‘maybe everything that dies someday comes back’, and in no place is that more true than disaster-ridden tourist destinations. All of those windblown roofs and drenched floors have to be replaced, and plenty of contractors eagerly flock to the site of hurricane devastation, ready to bring the dead (or at least rain-soaked) back.

However, even this boon creates a drawback–new jobs mean new potential pitfalls, for both crews and project owners.

The good news is, the good people over at zlien are pretty experienced in dealing with disaster recovery.

https://blog.zlien.com/construction-payment/the-disaster-recovery-playbook-for-construction-projects/

Now, as a landlocked lawyer, I’m going to defer to them on this stuff–living in New Orleans, they have a bit more experience with hurricane damage than I do.

What I will say, though, is that it’s a worthwhile read.  Some of the information is pretty basic, but invariably, the basics are what we all tend to forget once things heat up.

I know this sounds like a boring task, but please, sit down. Read. Then get to work rebuilding.

I promise, the twenty minutes spent researching this stuff now will be time well spent six months from now, once the hope of new granite and new jobs is replaced by the inevitable litigation of jobs-gone-wrong.

…………

On a lighter note, my vote is that The Band’s rendition gives the original a run for its money.

 

 

 

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Scary Contract Terms 101: Indemnification

October 9, 2018 Uncategorized 0 Comments

  As I have mentioned before (Paid when Paid), (Paid if Paid), I have more than a little bit of

construction finance indemnification

 

As I have mentioned before (Paid when Paid), (Paid if Paid), I have more than a little bit of experience reading construction contracts.

Aside from the payment timing clauses, another common but potentially scary topic that comes up in almost every construction contract is what’s called an Indemnification Clause.

Much like the dreaded Paid when Paid clause, this is another method that GCs use for shifting risk.

In this case, however, the risk being shifted is not that of payment, but rather of tort claims and insurance liability.

In short, depending on the precise language, an indemnification clause means that your commercial liability carrier will be held responsible for claims against the general contractor.

For obvious reasons, this is a clause that can have a pretty big impact on your financial security:  The key is, navigating everything carefully, and making sure that you have the right insurance coverage.

………

There are, essentially, three categories of indemnity provisions:  Limited, Intermediate, and Broad.

Limited indemnity provisions aren’t really scary all.  In essence, they only hold you liable to reimburse the GC for any actions brought against them by your negligence.  For instance, if you improperly install a window that falls on somebody, and that person sues the GC, the GC can come after you to reimburse them for what they had to pay out to the person.

Makes sense, right?

The second type of indemnity provision is an intermediate indemnity provision.

This provision means that you will have to reimburse the GC for any claims against them that arise at least in part out of your actions.

To go back to the falling window scenario, let’s say that the GC and architect provided faulty plans for installing the window, but you then did a shoddy of installation, making the situation worse than it already was.  As such, this falling window was kind of everybody’s fault.

If this happens, and the governing contract was one with an intermediate indemnity provision, you’re on the hook for reimbursing the GC for the entire value of the claim against them, even though their crappy plans played a role in the whole thing.

Or, to go back to childhood, remember that time when you were eight, and you and your brother decided to play football in the house, and you ended up breaking Mom’s favorite lamp?  And then Mom punished you, even though Stupid Chad was the one who came up with the idea?

An intermediate indemnity clause is the GC’s way of ensuring that they’ll be Chad.

Finally, the third time of indemnity clause is the broad indemnity provision.

This is Chad and his even stupider friend Brad playing football in the house, while you’re upstairs in your room doing homework.  You had nothing to do with this stupid idea.  And yet, low and behold, when they break the lamp, your parents still somehow decide to ground you, while letting stupid Chad off scot free.

Or, to go back to the adult world, you installed the window correctly.  When you left the job site, those were the safest windows this side of the Mississippi, installed to standards that no engineer would ever argue.

Then some other idiot came in adjusted the frame, causing it to fall on an innocent pedestrian.

You did absolutely nothing wrong, but under a broad indemnity provision, when that pedestrian sues the GC, he’s going to come back after you to reimburse him for a mistake that you were no party to.

…………………..

For obvious policy reasons, some states limit the power of broad indemnity provisions.  Other states, however, do not, and as such, it’s a good idea to read through the indemnity section of each contract.

Know what you’re liable for.  Make sure that your coverage is sufficient to cover your liability exposure.  If need be, ensure that your GC is listed as an ‘additional insured’ on your policy to cover any issues that might come up.

Ninety nine percent of the time, those indemnity clauses will never matter.  The one percent of the time that they do, though, can have a huge impact on your livelihood.  As such, it’s wise to make sure that you’re protected against Brad and Chad.

 

 

 

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Happy Labor Day

September 3, 2018 Uncategorized 0 Comments

Did you know that the first Labor Day was celebrated on September 5, 1882 as a celebration of the U.S.

Labor day construction finance

Did you know that the first Labor Day was celebrated on September 5, 1882 as a celebration of the U.S. labor movement, and social changes brought about by it?

More than 200 years later, we’re all still grateful to the men and women who work hard every day to keep the gears of our economy turning.  So to all of you, have a wonderful day, and enjoy the much needed break…you’ve certainly earned it!

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Do You Know How Much Your Jobs are Costing You?

August 30, 2018 Uncategorized 0 Comments

As I have mentioned before (A Penny Saved) one ironic part of this job is that I often find myself

Construction Finance job costing

As I have mentioned before (A Penny Saved) one ironic part of this job is that I often find myself serving as the world’s least qualified financial planner.

I…made an A in 11th grade Intro to Business?  And I somehow passed algebra.  As far as qualifications go, that’s about all I’ve got.

Then again, my advice is free, so I suppose you’re all getting what you pay for on this one.

Anyway, one issue that I run into again and again is that too many contractors don’t know how much they’re making on each job.  They know that the contract was for $400k.  They know that at some point, they eventually received $400k from the GC.  But, they have no idea how much they spent doing that $400k job.  Did the job cost them $100k to complete?  $200k?  $410k?  No idea.  They just know how much the contract was for, and that they definitely don’t have $400k in their account right now.

The reason?

Sloppy accounting.

Look, accounting sucks.  If ever get moved over to the accounting department, everybody will be in trouble, because I don’t know how much is in my own bank account right now, much less how to manage the books of multiple $5M+ companies.

What I do know, however, is that accounting is important.

On each job, you need to keep track of what you’re spending.  How much did you pay out in labor to complete that $400k job?  How much did you spend on materials?  What does your overhead look like? How much did you spend on finance fees?

I can’t count the number of times where, after finally sitting down with our accounting department to look at the numbers, our clients have realized that only 1/4 of their jobs are actually profitable.  Those profits, in turn, have  been covering the losses on the other 3/4 of their work.

If you really don’t want to have to mess with accountants, at the very least, do yourself a simple favor:  Keep a running tally of every cost on a job.  Write down every box of screws.  Every quart of paint.  Every pack of cigarettes you’re picking up at the gas station to keep an employee happy. Then, when the job is over, look over all of that.  Add up the numbers.  How much of that $400k job was leftover in profit?

On top of telling you how much you’ve actually made on each job, this will also give you a good idea of where you’re leaving money on the table.  Are materials always running 20-30% higher than initially budgeted?  Start giving yourself more of a cushion on material costs when submitting your bids.  Does XYZ Construction Corp. always seem to be hitting you with an extra $20k in work they won’t approve change orders for?  Don’t even consider working for XYZ again unless you tack an extra $20k onto your bid. Are you making 35% profit on service work, and 2% profit on AIA contracts? Focus on trying land more time and materials work, rather than bidding on those $650k projects that sound great but leave you broke every time.

Often, spending a total of five hours on each job doing this will help you see ways that you could be doing half the work for twice the pay.

Also, remember this: It’s not worth doing work that doesn’t make you any money.

Would you accept a job as a foreman where the company owner tells you that you’ll be working for free, but that in return, he’ll let you work for free next month, too? Worse, would you take that job if he told you you’ll have to pay him $20 a day for the privilege of working out in the hot sun from sun up to sun down?

Continuing to place low bids for bad GCs is doing exactly that–you are paying for the privilege of working hard. If you wouldn’t pay to work at Taco Bell, and you wouldn’t pay to go work for that big construction company across town, why would you pay to do this?

 

 

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Hats Off to the Ladies of Construction

August 26, 2018 Uncategorized 0 Comments

  Today is Women’s Equality Day, created in 1971 to mark the passing of the 19th constitutional amendment. Passed in

construction finance women's equality

 

Today is Women’s Equality Day, created in 1971 to mark the passing of the 19th constitutional amendment.

Passed in 1920, the U.S. constitution was finally amended to give women the right to vote–a change that suffragettes had been fighting for since 1848! (Side note, compared to that pace, I’m never nagging my husband about taking out the recycling again.  Sure, it’s been two days, but it hasn’t been 72 years, so obviously, things could be worse.)

To all of my fellow ladies of construction, hats off to you! We may not appear in many stock photos, but we certainly do our part to keep the wheels of commerce turning!

 

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Construction Finance Safety Minute: Avoiding Complacency

August 21, 2018 Uncategorized 0 Comments

  Construction is dangerous. Depending on exactly what you do, you are spending every day surrounded by heavy equipment, spinning

construction finance safety

 

Construction is dangerous.

Depending on exactly what you do, you are spending every day surrounded by heavy equipment, spinning blades, and/or things that will crush you if they fall.

Also, you may or may not be 100 ft. in the air while all of these things are going on.

Suffice to say, there’s a reason that construction workers are more likely to be injured on the job than loan officers are.

…………….

Over the years, a lot of time and money has been spent figuring out how to best combat this–after all, people being maimed or killed on the job isn’t good. That’s why OSHA has 9,000 pages of policy on the proper procedures for eating a sandwich.

The big thing about safety guidelines, though, is that in order for them to do any good, you have to follow them.

A hard hat that’s sitting in your truck will keep your upholstery safe, but it won’t do much for your brain. The harness you left on the ground is doing even less good–it’s not even keeping the grass safe!

And so, today’s PSA is an obvious one, but also a really important one:  Don’t fall victim to complacency!

I know this is the 100,000th board you’ve cut. I know this is the 600th cell tower you’ve climbed. I know this the 4th window you’ve installed today.

But you know what?  I’ve typed my name quite a few times over the years, and I still managed to misspell my own freakin’ name in an email the other day.

The difference is, I sit at a desk all day.  I can misspell my own name as many times as I darn well please, and I’m still going to live to misspell something else tomorrow.

Construction isn’t like that.  Falling off cranes is one of those mistakes you usually only get to make once.

So please, be careful out there.  Follow those “stupid” productivity-killing safety precautions your contract mentions.  Wear the hardhats and harnesses and other protective gear they give you. Don’t disable the safety triggers and protective guards on equipment.  Do pay attention to what you’re doing.

I know you’ve done it 100 times, but I want to see you live to do it 101.*

 

 

*Edit: Yes, I realize that this is ironic post to write immediately after encouraging our nation’s youth to go into construction.  You know what? I want those future construction workers to be, too!  Because building things awesome, but it can also be ridiculously dangerous if you don’t follow the right precautions.

 

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Dear Young People, The Construction Industry is Hiring

August 16, 2018 Uncategorized 0 Comments

  As those of us on the front lines of construction know, the workers in our industry…aren’t getting any younger. WSJ-Young

Construction Finance

 

As those of us on the front lines of construction know, the workers in our industry…aren’t getting any younger. WSJ-Young People Don’t Want to Work Construction

Tech? Full of kids who don’t remember 9/11, much less my favorite childhood TV show, Rescue 911.  STEM?  Sure, they were lacking qualified candidates for awhile, but every year, we’re getting a new batch of scientists and engineers with names like ‘Skylar’ or ‘Haidyn’.  The service industry? Pretty sure my last waiter was still waiting on a visit from the puberty fairy.

But construction?  We’re a world of guys with names like ‘Bob’ or ‘Steve’, nary a Bradyntyn or full head of hair in sight.

And that’s not a good thing.

………………………………..

As I say this, I realize I’m only further damning myself–after all, what kid wants to hear Bob and Steve talk about Trans Ams and AC/DC when they can get a free coffee during every shift at Starbucks?

Well my dear kids, the answer is simple:  Bob and Steve can afford to restore Trans Ams!

That’s right–at the risk of stating the obvious, construction pays well.

Or, to elaborate further, construction pays well for regular people.

Being a brain surgeon? Great job if you’re cut out to be a brain surgeon. Not such a great option if you’re like I am, and made a D- in high school algebra. Engineering? Again, the median pay is decent, but not exactly the most sensible choice for those of us trying to figure if a 24oz. can of beer offers a better value for the dollar.  Investment banking? Great if you can make it to the top, but those 80 hour workweeks are kind of a drawback. Law? Same story.

But construction?

Show up. Do your job. Make enough that you won’t need a free frappe per shift as compensation. Stick with it long enough to actually know what you’re doing. Make more than any of us backoffice people.

No college needed. No six figure student loans.  No requirement that you sacrifice your youth to the altar of 17-hour days in hopes of making it to managing partner.  Just…regular hardwork.

……

Also, FYI, once you get to know them, Bob and Steve are pretty awesome!  Bob can probably give you good advice on whether to buy that house that looks awesome but has a leaky roof. Steve grills a mean steak, and even though he’s not a mechanic, he’s usually right about why your car is making that funny sound.  Those are the kinds of superpowers that us old people have–our shoes may be sensible, and our jeans may be dorky, but we know lots of useful things that your friend Zaine* won’t learn for another 20 years!

 

 

 

*Are these real names? I don’t know, kids.  I’ll be the first to admit that I’m out of touch. But I do know some nice casserole recipes and how to help you pick a reliable car. Because that’s the kind of knowledge God gives you in exchange for your fashion sense and knees that don’t creak when you walk up the stairs.

 

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