Many contractors struggle with overdue accounts, which affect their ability to cover equipment, material and labor on future jobs. Low work volume and tight credit markets make it more important than ever to protect your cash flow from delinquent clients.
Follow these seven strategies to help minimize the risk of late payments:
1: Build Protective Language Into Your Contracts
Homeowners are sometimes tempted to withhold money until they’ve examined every nut and bolt. That’s why Peter Merrill, president and CEO of Santa Fe, N.M-based Construction Dispute Resolution Services LLC, insists on including dispute resolution clauses in construction contracts. He says the threat of arbitration keeps people from making frivolous complaints or withholding final payments. Arbitration is a very fast and inexpensive procedure as opposed to the lengthy and costly litigation process.
And contracts should base payment on “substantial completion,” he says. “It’s an industry accepted standard. If you’re missing a light bulb, you’re still entitled to payment.” Merrill also recommends including “prevailing parties” language in contracts so that if a dispute is ruled in your favor, you don’t incur any costs and you can further deter homeowners from making frivolous or false complaints.
2: Ask for Money Upfront
Roger Beaulieu, the owner of Sabattus, Maine-based Beaulieu Industries, a light residential and commercial construction business, says 40 percent to 60 percent of business is typically affected by overdue accounts.
“We try to get a third as a [down payment] before we start,” he says. “Halfway through we get another third. That’s been working out fairly well. The clients feel more invested in the project.”
3: Establish Expectations
There’s no one rule for payment timing, but when clients understand your expectations, they’re more likely to meet them. Many contractors consider anything less than 30 days to be prompt and become more aggressive with follow-up letters and calls in the 60- to 90-day period.
But when you’ve sunk your own funds into a job, “you should get your payment when it’s complete,” says Merrill, who formerly owned a kitchen design company. When checks didn’t arrive on time, he’d let clients know if and when he was starting an arbitration process that would require them to cover their fair share of his legal expenses when he didn’t receive payments on time. “People immediately turned around and paid,” he says.
4: Select Appropriate Software
Spreadsheets can help track vital details related to cash flow. But if you’re in over your head, consider using software that can do tasks such as bill clients by job phase and manage subcontractor liability. Choose a program such as QuickBooks Premier Contractor, which is designed for builders, general contractors and specialty trade contractors. In addition to producing bids and contracts, it tracks payment status and alerts you with due-date reminders.
Additionally, programs like Expedition create repeated letters that progress from gentle reminders to gradually more threatening letters as accounts become more past due. At the very least, software can help churn out letters as a formality — and then you can follow up with a call.
5: Know Whom to Invoice
Company presidents aren’t usually the ones cutting the checks, and sending your invoice to the wrong person can result in long delays. “When I’m a subcontractor, it doesn’t matter who the ultimate client is,” says Susan Samson, president of Chicago Structures LLC, a general contracting firm specializing in concrete bridge rehabilitation. She finds out whether a company comptroller or office manager oversees payment so she can follow up if necessary.
If a problem client took out a construction loan, try submitting your invoice to the bank that issued the loan. “A lot of banks will send an inspector out to make sure work is done,” Beaulieu says. “On occasion I submit bills to banks, and it works.”
6: Meet Face to Face
Although Beaulieu Industries sends monthly bills, Beaulieu finds that knocking on doors is more effective. “I don’t like getting a lawyer involved. You’re better off working things out on your own,” he says.
Oftentimes the problem isn’t getting stiffed but waiting months on end to get paid, but building relationships with the right people can help expedite the process. Samson tries to get to know the people in accounting departments well enough to put a name to a face.
7: Be Willing to Negotiate
It might be worth it to negotiate with someone to get partial payment. And although Merrill advocates for builders to include late charge provisions, he also recommends throwing them out or lowering them to avoid penalizing a client you’d like to do business with again.
Finally, don’t get buried in projects. “If you have too many irons in the fire, you tend to get sloppy,” Beaulieu says.
Be sure to join the Lowe’s ProServices LinkedIn Group to read additional content and interact with other Construction/Trade and MRO professionals.