Although only a moderate improvement to the construction economy was predicted by economists for 2013, the initial numbers are a lot more promising. This is especially true in the housing market. Just a few weeks ago the New York Times published a story on how the Sudden Rise in Home Demand Takes Builders By Surprise. They are not the only one. Word is everywhere that the construction sector is the bright spot in the U.S. economy and that homebuilding is particularly hot.

Obviously, news of an improving economy is good news, and very welcome news to an industry that has suffered greatly over the past 5-8 years. The troubling news, however, is that a rebounding economy can be more financially dangerous than a receding one.

This article explores why that is, and provides you with some information on how to protect your business against the risks.

Rebounding Economies Create Financial Risks And High Failure Rates

Predicting positive economic news in the new year, ENR.com ran a Viewpoints article by Thomas C. Schleifer at the very beginning of 2013. Schleifer is a research professor at Del E. Webb School of Construction, and his article examines the impact of recovering economies on construction businesses. Read the full article here:  Beware The Recovery: What History Teaches Contractors and Sureties.

According to Schleifer’s research, “the failure of construction enterprises is three times worse during recovery than during the downturn.” One reasons for this is the availability of cash. Having just plowed through a recession, most construction companies are cash poor. The rebounding economy, however, is producing lots of work requiring cash. Ergo, a cash challenge.

There’s a number of other factors to this point that Schleifer doesn’t explore, such as the practical problems when scaling businesses in a rebounding economy. This is explored in the NYT’s article above-cited, which suggests that homebuilders are having trouble finding laborers who are no longer available and getting permits from governments who have significantly scaled back their own labor forces.

In other words, the market is strong, but all of the infrastructure collected during the building boom has been undercut.

How To Protect Your Business From The Risks Of A Rebounding Economy

You now know that the rebounding economy can be financially dangerous. Let’s now explore what you can do to protect your business from these risks.

#1) Don’t Bite Off More Than You Can Chew

This first point may seem obvious, but it is extraordinarily difficult to do. Your company has been starving for years. If only the market would turn around…well, it has.

Your first instinct is to accept new business and ramp up production. Plus, over the past few years you’ve probably gotten into the habit of saying yes more often than no. Resist the urge to say yes to every opportunity and really think through what your company has the cash and capability to complete. Taking business you can’t handle may suffocate you faster than the downtown ever could.

#2) Mechanics Lien Rights – Protect Them And Perfect Them

Your company is not the only one affected by the recession. Everyone was impacted. Your customers, the property developers, the lending institutions, etc. Cash is a problem for all of these parties. And, as a result, it’s more important than ever to have security on a project just in case one of these parties are unable to pay.  This, of course, notwithstanding all of the other reasons why you should protect your mechanics lien rights.

Mechanics lien rights are a gift to those in the construction industry, and savvy companies understand not only how these instruments work, but also that the use of mechanics lien rights is the single most effective way to keep a strong bottom line.

Preserve your mechanics lien rights on every project by sending preliminary notices. Perfect your rights if unpaid by filing a mechanics lien. Don’t make exceptions often, and don’t be gun shy.  Especially in a rebounding economy.

#3) Smart Credit Decisions That Understand The Challenges Facing Your Customers

The previous section just discussed how cash is a problem for everyone. This is important not only to encourage mechanics lien compliance, but also to encourage smart credit policies and credit decisions.

Companies who will excel in the rebounding economy will understand the cash challenges facing their customer, and this understanding will be reflected in their credit and collection policies. Know who you’re doing business with, and prepare for them to have cash crunches over the next year or two.

Make smart credit decisions. So, not only do you need to avoid taking on more work than you can handle, but you also need to avoid doing business with companies who are making this mistake. At the very least, you must avoid doing it without mechanics lien protections in place.