Cashflow and Pay Rise As Key Metrics in Economic Crisis
Turner Construction Co. and the architect for the first KidZania children’s amusement center in the U.S., which opened in Frisco, Texas, in November, claim in liens filed early this year that the company owes them more than $8 million. Much of the amount claimed by Turner is reflected in liens for hundreds of thousands of dollars filed by several subs.
Spike Cutler, a Dallas-based attorney who represents many subcontractors, says that there has been a crest in lien notices and claims in the weeks since the beginning of the COVID-19 pandemic crisis. Many companies, responding to the emergency, simply stopped payments, he said.
As the problems of collecting money have come into focus during the pandemic, the vulnerability of construction subcontractors is more keenly appreciated—along with the condition of their balance sheets. “Cash is king in environments like this, and it’s mission critical to remain focused on cash flow,” said David Bone, a partner in HKA, the dispute consultant. He moderated a webinar April 14 about the financial aspect of the crisis held by the American Bar Association. A consensus emerged that owners and contractors should closely monitor both projects and documentation needed to identify possible problems.
Monitor All Tiers
Webinar speakers indicated that a subcontractor’s failure to pay its subs or suppliers can be a sign of trouble. John Finch, CEO of PBG Builders, recommended that prime contractors identify all tiers of contractors and suppliers and assure that they are being paid. “We’re closely monitoring the flow of labor and the delivery of materials,” said Brett Lamb, general counsel for the aviation group of contractor Austin Industries.
Overbilling by subcontractors—an often unintended yet common practice even in flush times—could become more prevalent. “We are constantly monitoring each subcontractor’s stage of work against billings,” Lamb added.
Reed Sellers, a senior manager at Wipfli, an accounting firm, said during the webinar that COVID-19 is pushing both contractors and owners to get back to basics that may have been overlooked in recent years. Among them: tracking receivables, reviewing accounts payable ledgers and scrutinizing contracts and insurance policies for protections and remedies.
“We’re all seeing unique costs surrounding COVID-19 that we didn’t anticipate, and we need to track those costs” to be reimbursed, he added.
How long subcontractors must wait for payments will also determine which ones survive the market turmoil. A media official for Turner Construction Co., which like most construction managers did not pay subs as it was not paid by the owner, could not be reached for comment. The lien-related filings involving the Frisco-based parent of KidZania’s U.S. franchise, Educity Park Frisco LLC, predate the pandemic and first became apparent on the website of Levelset, a payment services software company. The lien had been noted in a February newsletter distributed to members of the Subcontractors Association of the Metroplex, whose members work in the Dallas area.
Educity Park is also building amusement centers in Oakbrook, Ill., and East Rutherford, N.J. A spokeswoman said in an email that the company “expects the liens to all be amicably resolved in the very near term.”
Educity Park’s franchise was granted by the Mexico City-based parent company whose KidZania centers have been built in 20 countries. Educity is the owner-operator that contracted for the build-out in Frisco and financing for the Illinois and New Jersey projects. The KidZania spokeswoman declined to answer further questions.