Debt Incurrence in the construction industry is a frequent occurrence and can significantly impact the interests of various parties involved. Therefore, debt collection in the construction sector is immensely important and has a substantial impact on the cash flow of businesses or individuals participating in investments. In this article, TNTP’s lawyers will provide insights into what can be considered an opportune time for debt collection in the construction industry.
1. What constitutes debt in the construction industry?
The construction industry encompasses various related and interdependent sectors, including raw materials, architecture, structural engineering, real estate, land management, and more. Consequently, the debts incurred within the construction sector are diverse and intricate. However, TNTP will specifically focus on debts arising from commercial real estate projects – one of the activities that frequently generate challenging debts.
Entities incurring debts in the construction industry can range from investors, subcontractors, real estate brokers, suppliers of construction materials to both organized and individual investors. Debt incurrence can take place at various stages, including before project approval, during project execution, during project acceptance, and even when the project is being marketed and sold.
2. Optimal Timing for Debt collection in the Construction Industry
Due to the extensive nature of the construction industry, involving various entities, determining the ideal timing for debt collection depends on several different evaluation criteria, such as the ongoing relationships, entities incurring the debt, the quantity, and the timing of the debt incurred. Specifically:
a) Based on Project Completion Level
Considering the level of completion of a construction project, the opportune time for debt collection should be before the project’s completion. At this stage, all parties involved will have prepared for the acceptance process, which serves as a basis for the project’s execution. This period also makes it easier to identify responsibilities if there are issues with the project, such as quality or progress, based on the contract’s terms. For investors, this is a time for project review and inspection of the work carried out by construction subcontractors. If any issues arise during the project, investors can rely on these issues to request explanations from subcontractors or deduct costs if losses occur, or if the project’s progress is delayed, affecting the business phase.
b) Based on the Importance of Construction Projects
Within a construction project, there are various components with varying degrees of importance. In cases where the execution of a significant component is underway, it is advisable for all parties to consider resolving debt as early as possible to mitigate risks that could directly impact the quality and progress of the construction. When debt remains unresolved for critical project components, the project may face shortages in materials, insufficient labor, and the construction unit may struggle, leading to delays or compromised quality due to conflicts arising from late payments.
Debt incurred at critical project stages can be attributed to various factors, such as rising material prices leading to suppliers’ inability to fulfill quantity and quality commitments to construction contractors, delays in bank disbursements due to market-related cash flow fluctuations, or failure to recognize the significance of these stages leading to a lack of concentrated funds to be mobilized at the right time. Regardless of the causes, debt incurred during critical stages of a construction project will significantly affect the entire project, and in some cases, the operation of businesses. Therefore, businesses should aim to resolve these debts as early as possible in such scenarios.
c) Based on the Financial Capability of the Debtor
In practice, businesses can only make payments if they have the capacity to sustain their operations and cash flow. No business can settle debts if they are unable to maintain their operations. Similarly, in the construction industry, businesses should consider taking necessary measures to recover debts from debtors with strong financial capabilities while being cautious of debtors showing signs of insolvency or ceasing operations.
Businesses should take essential steps to assess the financial capability of debtors in order to determine whether they are financially sound. This assessment may involve reaching out to partners or financial institutions to find out if the debtor is accumulating unmanageable debts or engaged in disputes with other businesses. Once the financial capability of the debtor is established, businesses can proceed with debt collection measures to ensure the most effective repayment of the debt.
Above is an article by TNTP lawyers on the topic ” Favorable time for debt collection in the construction industry” We hope this article is helpful to our readers.