Forced Negotiations

In the case of Ro-Mac Lumber’s residential builder, we have a personal guarantee from him, which means we can attach his personal net worth. However, in today’s economy, many of these local builders have a negative net worth. This builder called me last week and said he’s made the decision to let the bank have the house back, and he has a limited fixed income to pay the debt. It appears bankruptcy is his only option if we insist on collecting the $9,000 owed to us. He told me he could pay $5,000 on the bill, if we are willing to settle for that amount. My options were clear: $5,000 or nothing in a possible bankruptcy with huge legal expenditures. I countered his offer with $5,810, and I’m waiting to hear back from him. This is a “forced negotiation” at its worst.

We operate our company extremely tight on collections, and most marvel at our collection rates and days outstanding. Even for us, these “forced negotiations” are troubling spots to be in. Here are some of my recommendations for limiting your risk of “forced negotiations”:

1. Qualify the project, the owner(s), the builder(s), and the subcontractor(s). If the players aren’t creditworthy, then the project is probably a dud. This means updating the credit of even a 20-year customer.
2. Don’t allow builders and project owners to not have skin in the game. Get personal guarantees. Can anyone go to a bank today and get a credit line of $50,000 without a personal guarantee? Then why can they come to the local building supply outlet and expect to not have to do the same?
3. Don’t bid projects with desperate pricing hoping everything will go perfectly. A winning bid in this economy usually means somebody made a mistake in bidding by missing something or they are not covering costs. If you have a project owner or contractor who’s cherry-picking your price or rebidding to rebid the price down, let some other sucker have it. If they immediately start playing games with you during the pricing stage of the project, then how do you think they will be when it comes time to pay?
4. Know the facts of the projects, such as who the owners are, where the financing is coming from, and the legal status of the property. Follow all pre-lien and bond requirements in the state to ensure you are in the best legal position if the project goes bad.
5. This is a hard one: Don’t do anything for free or beyond your scope of work. If you start caving in on items and specifications in which you are not getting paid, you will become an easy mark for the contractor.
6. The phrase “the customer is always right” doesn’t apply to many project owners and contractors in this current environment. Desperate people who bid projects will errantly blame their own mama for mistakes if they can save a dime. If you take the notion that the customer is always right on projects in this environment you’ll be blamed for everything that goes wrong on the project. As conflicts arise, you need to stand firm, document, document, and document because desperate contractors are searching for ways to not pay you.
7. Don’t give project owners and contractors the opportunity to take advantage of you. Double-check, double-check, and then double-check again. Know your facts, don’t bid projects or order merchandise from non-finalized prints, and get their authorizations to purchase. You need to make sure your customers are signing the dotted line or issuing a purchase order.
8. You’d better read or have someone competent to read all of the legal mumbo-jumbo on the back of large project purchase orders to ensure you didn’t just sign your rights away for protecting your interest. Lawyers write terms for the benefit of the person writing the contract. A pen is a nice thing to use when reviewing terms to cross out over-the-top stipulations, which will impede your efforts in collecting.
9. Times have changed for everyone. The customer who’s been buying from you for 20 years may be eating pork and beans at the house and could be literally one step away from bankruptcy. Everyone and everything must be verified in regards to projects, and a spit handshake in this economy is worth nothing. As President Reagan said, “Trust but verify.”
10. Some builders and project owners can charm a Texas rattlesnake, and many times dealers are so eager to get the business that they will be sweet-talked into supplying bad projects. These dealers will usually see some negative signs and hear the little voice in the back of their head telling them something is wrong. Despite this, they listen to the snake charmer telling them about all of the money they are going to make. Dealers, when a project “smells bad” you need to do one thing – run like hell from that project!
11. When a project goes bad, play hardball. In these negotiations, the goal of the project owner and contractor is to take advantage of you as much as they can. The allure of “make-believe” projects later down the road is a ploy to get you to cave in. You have a limited time to collect your money, so chunk hardballs without flinching!

The rules of the game in dealing with builders and project owners have changed, and the supply highway over the last two years has been littered with the dead bodies of good companies who were destroyed via “forced negotiations.” If the dealers in this industry expect to be dealt with fairly then they must adopt real standards for qualifying projects. The desperate need for business doesn’t outweigh the need for using sound business sense for evaluating projects, and it will save your company money to walk away from them.
Accurate reporting to credit bureau agencies is important in helping our industry identify bad business behavior, and competitors should participate honestly with all local round table groups on credit sharing. Dealers and suppliers who are not willing to share accurate credit and job information about customers to others is perpetuating this cycle of “forced negotiations.” It is not in any company’s best interest to have unscrupulous project owners and builders dominating the price direction of the market. The industry must take a firm stand against their practices.

Don Magruder is CEO of Ro-Mac Lumber & Supply in Central Florida and former chairman of the Florida Building Material Association. This article originally appeared in FBMA’s Dec. 2 newsletter.