As a contractor, you are intimately familiar with the financing problems that arise during construction projects. Maybe the owner has decided to cut off your supply line, or perhaps your cost estimator gave you a faulty or poorly researched estimate; either way, financing problems are common in the construction industry, and it’s important to understand how and why these issues surface.
The Fort Lauderdale construction attorneys at Cotney Construction Law discussed initial capital investments and financing on the project- and corporate-level in part one. Now, we will continue to discuss expenditures, revenues, and financing options.
Financing at Various Stages of the Project Timeline
Early expenditures for construction projects require a substantial frontend investment. As the project proceeds, contractors must work efficiently to counteract the negative cash balance. Expenditures for the planning and design stages are typically modest, but the initial procurement of labor, materials, and supplies can be immense.
Although a skilled contractor can reduce the cost of construction and help nullify the frontend investment, revenues won’t be generated for the owner until the project has been completed. Still, the contractor will be compensated periodically as construction proceeds to ensure that all goals are met and the project reaches fruition.
Figuring out the best way to fund a project is generally up to the owner, but you should always remain cognizant of who and where your funding is coming from. Long-term revenue sources include sales, grants, and tax revenues. Short-term sources of revenue include borrowing, grants, corporate investment funds, payment delays, and others.
Different financing options are sourced from various participants including third parties like banks and bond underwriters. Private construction projects utilize different financing arrangements during and after construction. After construction, mortgage or loan funds can be easily secured against the value of the project. The variable nature of financial planning means that no two projects will be financed in exactly the same way, so you should consult with a Fort Lauderdale construction attorney to help you review your contracts and recognize your precise obligations to the owner.
Borrowing as a Contractor
Unlike owners, contractors often find it challenging to borrow the funds needed to make ends meet on the project site. Shockingly, bank account overdrafts are the most common form of financing for small- to medium-sized construction projects. If you decide to borrow money using this method, you are expected to reveal all subsequent expenditures and receipts to the bank. Fortunately, if you are a contractor working on a large project, you likely own enough substantial assets to access alternative forms of financing that have lower interest charges.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.