How construction contractors can avoid or handle nonpaying customers
Thursday, April 18, 2019
When construction contractors do business with clients, there is a fair expectation of payment for materials, labor, and services supplied. But sometimes, a client is unable to pay due to their financial difficulties and other situations, for reasons honest and otherwise.
Regardless of the circumstances, however, not getting paid will hurt any business. Construction contractors need to have a strategic approach to collecting money and preventing non-payments from constricting their cash flow.
Here are some approaches that construction contractors can use to avoid and handle nonpaying customers.
Preventing Nonpayment and Ensuring Timely Collection
1. Vet potential clients before closing the deal.
In an industry with frequent payment delays and nonpayment, it is important to exercise due diligence before sealing the deal with a client. If it is your first time working with a client, take the time to research them, look up their credit history, and ask contacts if they know anything about your prospective client.
Do they have a reputation for late payments or nonpayment? Do other businesses refuse to do business with them because of their reputation? Asking these questions can save you from headaches in the future.
Contractors should also check if there are complaints lodged against the client on social media profiles, company pages, and sites like the Better Business Bureau. Court records and notice of liens are also publicly available and should be studied.
2. Create a solid contract with a clear payment policy.
There is no document that can absolutely ensure payment, but a solid contract help construction contractors enforce their right to be paid. Before closing a deal with any client, make sure they are aware of how much they have to pay, what exactly is included in the contract price, when they can expect to be invoiced, and what payment options are available to them.
If you want to impose penalties for late payment, the contract is the perfect place to outline the terms of doing so. This way, you will be able to legally enforce the penalties.
3. Send invoices and follow-ups regularly.
With many tasks on the plate of any construction business owner and their accounting staff, it is easy to lose track of the details of customer invoices. However, forgetting to send one to your client will easily put your payment in the backburner.
As soon as the job is done or a milestone is completed, send the invoice right away. It’s also advisable to set a regular schedule for sending bills. Additionally, don’t hesitate to send follow-up emails or calls to clients with accounts that are past due.
This process can be time-consuming but persistence is the key in collecting receivables. Automating your collection process can also save you a lot of time and help you develop a regular payment cadence with your clients.
Billing consistently puts emphasis on settling the account more quickly, which also allows the client to focus on more important things. Your clients will realize that it is much more convenient to just pay you than dodging your calls.
4. Send a preliminary notice to secure your lien rights.
Preliminary notices are sent by contractors to make sure their right to file a mechanics lien is secured in case of nonpayment. It’s not a threat -- it’s simply a legal document that helps contractors prevent abuse by dishonest clients.
Contractors must send preliminary notices for all their contracts, even those with good accounts. This way, your right to lien is protected and you will have the option to file a mechanics lien should a payment issue arise. Good clients know that experienced and competent contractors always deliver preliminary notices to protect payment rights and will not see this as a threat but a reminder to settle.
Handling Nonpaying Customers
Despite your best efforts to vet clients and apply billing best practices, there will be situations where invoices go long overdue and clients go MIA. Here’s how you should handle these sticky situations.
1. Communicate with the client in person.
If follow-up emails or calls do not work, it is time to drop in and visit the client in person. It is easy to assume that the client is operating in bad faith, but there could be plenty of legitimate reasons why the client’s payments are delayed.
Visiting the client allows construction contractors to find the root cause of the late payment, taking out the unnecessary guesswork. Ask if the work done is unsatisfactory, or if the client has trouble paying due to financial problems. If the latter is the case, consider offering a payment plan to maintain a good relationship with the client and at least recoup job costs.
2. Send a Notice of Intent to Lien
If the client fails to pay past the due date and your work on the project has been completed, it’s time to consider filing a mechanics lien. In many states, you are required to send a Notice of Intent to lien — a demand letter of sorts — 10 to 30 days before filing a mechanics lien. This period allows the client to pay their debt and avoid the serious implications of getting a lien on their property.
3. File a mechanics lien on the property.
If the notice of intent did not work in prompting the client to pay, the best course of action is to file a mechanics lien. Laws are strict about the deadlines of sending notices that are required for filing a lien so check existing state statutes to avoid losing your lien claim.
You can also use automated lien filing services to hasten the process and ensure accuracy. Remember, neglecting to abide by state deadlines and requirements may render your claim invalid, making you lose your chance to recoup losses.
Securing the right to file a mechanics lien as a remedy against nonpaying customers is invaluable for construction contractors who otherwise wouldn’t have a legal recourse.
Ideally, contractors only go into business with clients who pay on time. Unfortunately, there is no way to guarantee this. To protect your finances and your business as a whole, it’s best to take a proactive approach in preventing late and nonpayments.
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