By: Patrick Hogan on May 9th, 2022
What To Do When Construction Clients Don’t Pay
In construction, late payments are common, and it takes considerably longer for construction businesses to get paid. For construction businesses, the average daily sales outstanding (DSO)—the time it takes to collect on invoices—is 60 days. The general DSO average across various business sectors in the United States is 45 days.
Whether you're facing your first payment delay or have been seeing a pattern of late payments from the clients you serve, this article will help you take a more strategic look at promoting timely payments in your business.
Automate Payment Reminders
When a client misses a progress payment, a milestone payment mid-project, it's easy to start catastrophizing and make decisions in haste. However, there are many possible reasons why payments may be late, especially in the middle of the project. Milestone billing has a lot of upsides, not only to get on the same page with your client regularly but also to stay top of mind for payments. But if you're sending late or incomplete invoices, you're doing yourself a disservice.
It's essential to ensure you're sending invoices regularly to serve as payment reminders and ensure that any disputes are addressed earlier on instead of piling up. Invoices must include all information the client requires—some may use payment portals that process invoices in specific formats only, and you need to clarify this at the beginning of the project. And even if you fail to do so, sending regular invoices allows you to catch these mistakes earlier on. Automating your invoicing goes hand in hand with automated payment reminders.
Late payments are not always the result of a lack of funds or other more significant issues. Clients may be dealing with many projects, and you must make an effort to ensure that you stay in their field of vision to get paid.
Get Direct Feedback on the Work
Communicate directly with the client regarding their feedback on the work provided to determine if they are withholding payments because they are not satisfied. Knowing this early on is key to resolving the matter quickly.
There are cases where there was a misunderstanding regarding expectations, and a quick reference to the contract can get you both on the same page. Skirting around the issue will result in lost time and money. Providing options regarding the next step will help move the process along and get you paid.
If the client requires changes not included in the contract and you've provided work or materials as described in the agreement, you must open an honest discussion regarding additional work. Of course, avoid agreeing to perform unpaid work. Suppose the client refuses to pay after a straightforward conversation about the project status and the past-due payments. In that case, you have to defer to your legal rights and start the process of filing and enforcing a mechanics lien to get paid.
Protect & Exercise Your Lien Rights
Unfortunately, there are situations when the client does not pay despite the contractor providing what's contractually required. For these cases, contractors are protected by state lien laws. Mechanics liens are a legal claim that works by placing a hold on the property where contractors, subcontractors, suppliers, and other construction professionals provided labor or materials. A mechanics lien can be filed and enforced if the client fails to pay, resulting in a foreclosure sale to pay claimants.
All businesses operating in construction must familiarize themselves with the lien laws of the states they operate in, primarily because they come with corresponding responsibilities. Most states require contractors to file a preliminary notice to ensure that they can file liens. For example, a preliminary notice in California must be filed within the first 20 days of work or materials delivery to protect the entirety of the labor or materials provided. In many cases, the failure to send preliminary notices results in losing the right to file a mechanics lien.
Using lien management software that helps avoid missed deadlines or inaccurate notices is a sound investment for any construction business that deals with many projects with increasingly complicated lien requirements and deadlines. It saves you time and eliminates the risks of errors that can cost you your right to lien.
Strengthen Client Vetting
While late payments are not unusual, there are situations where payments are delayed because clients are unable or unwilling to pay in the first place, even before the project ends. You must screen for these clients. While there is no foolproof method to avoid getting into business with delinquent customers, exerting extra effort to ensure a mutually beneficial project is best for your business in the long run.
A solid credit policy is crucial, especially in construction, where most deals are on credit. Your credit policy informs your client vetting process and serves as a cornerstone of your risk management strategy. Having a process in place to determine if a client is creditworthy and how much credit is reasonable to offer will save you a lot of extra work chasing unpaid invoices or having to enforce mechanics liens.
The value of vetting prospects can't be overstated. Getting more sales by being very lax might look good on paper initially, but ultimately, delinquent clients will hurt your bottom line.
Ensure Ironclad Contracts
Some businesses may be tempted to treat contracts as mere formalities when closing a deal. However, the contract will be the source of truth for both parties for the project's entirety. Ensuring that the work required is spelled out clearly in the contract will make conversations more efficient in the longer run, especially around payments. As long as you provide what's on the contract, you are entitled to get paid. Solid contracts for all projects and prudence about filing the required notices to protect payments are a must for any business in construction.
Strategically Tackle Late Payments
If you often deal with late payments and feel like your back is always against the wall, it may be a signal that you need to look at your overall strategy. From vetting clients, protecting your lien rights, and ensuring transparency throughout construction projects, there must be a throughline in your processes that underscores getting paid on time. Maintaining good cash flow is key to the success of your business, so you must put the same value and effort into it as you do with delivering quality services and materials.
Patrick Hogan is the CEO of Handle.com, where they build software that helps contractors and material suppliers with lien management and payment compliance. The biggest names in construction use Handle on a daily basis to save time and money while improving efficiency.