Even though construction spending is up across the residential, commercial, and public sectors after overcoming the initial impacts of the COVID-19 pandemic, payment problems continue to mar the growth of contractors across the country.
According to Levelset’s recent 2022 Construction Cash Flow & Payment Report, Construction businesses have noted that slow payments are leading to wasted resources, reduced profits, and difficulty meeting payroll. Contractors have also noted that the issue of prompt payment is also pointing directly towards the fact that only 12% of businesses report always getting paid on time, and only 15% of businesses noting that they’re always paid in full for their work — with these issues disproportionately impacting subcontractors and material suppliers.
Unfortunately, these issues were in full focus for Texas contractors during April 2022, as eight construction companies filed for bankruptcy — with six filing for Chapter 7 and two filing for Chapter 11 bankruptcy protection.
A number of disparate companies filed for Chapter 7 bankruptcy protection throughout the month:
- Longhorn Mulching, Inc. (April 8)
- Players Choice Greens of Temecula, Inc. (April 15)
- Oscar Lara Electric, LLC (April 25)
- RTRA Properties, LLC (April 27)
- Friesenhahn & Marbach Construction, Inc. (April 28)
- One World Stone, LLC (April 29)
Chapter 7 is perhaps the most difficult form of bankruptcy for contractors, as it doesn’t allow for any reorganization of debt or plan of repayment for the debtor. Most of the time, Chapter 7 bankruptcy filings result in loss of property and assets and, often, the dissolution of the company.
Learn more about the different types of bankruptcy chapters in construction.
Friesenhahn & Marbach Construction’s filing is particularly interesting, as its drop in revenues over the past years has been extreme. Despite listing $3,339,735 in revenue for 2020, the company claims to have gained only $849 in revenue during 2021 and only $431.31 during the opening few months of 2022.
Likely related to this, the company only lists $5,924 in cash as its assets, and notes that while it has no immediate liabilities, it has a pending legal action that it expects will lead to as many as 13 unsecured claims impacting its situation.
A handful of the filings display how even a relatively small amount of debt can put contractors in an untenable position.
Players Choice Greens of Temecula, for example, has $209,433.80 in debts, but only $40,000 in assets. Even companies with more significant assets are getting impacted, as well. RTRA Properties has a significant $652,872.86 in assets — $550,000 of which being actual property — but is also dealing with $3,248,071.85 in debts.
Additionally, two companies filed for Chapter 11 bankruptcy:
- Service One, LLC (April 21)
- Black Pearl Exploration LLC (April 24)
Chapter 11 bankruptcy protection is much more forgiving for contractors — it’s frequently called “reorganization” bankruptcy, as debtors are allowed to remain in possession of their assets and continue to operate their business while developing a plan of repayment for their debts.
Many companies which are operating at small losses go down this route, and these companies are dealing with similar circumstances. Despite having $373,274 in assets, Service One dealt with operating at a loss of just over $91,000 during 2020 (its most recently reported financial year), showing how problems have been significant for contractors for the duration of the pandemic even as business begins to boom once again.