Updated: 2 days ago
As we all know, payment problems in the construction industry are a common cause of disputes, taking up time, energy, and energy at all levels. Unlike every construction or field service business, most things may be related to it: the trouble of delayed customer payments. In fact, a study of 1,300 contractors found that 88% of businessmen usually wait more than 30 days to get paid for their work. Most importantly, 46% of these contractors had to use their personal savings or corporate accounts to pay for management fees and other necessary expenses.
How Can Late Payments Affect Your Business?
The annual report of PWC in 2018 revealed an average time of 83 days for contractors to get paid. It is quite an increase compared to the 74 days in 2017.
An enlightening study conducted by the consulting firm Plum showed that 11% of all invoices issued by small businesses were not paid on time. Add up all these late fees and you will get a total of more than $1 trillion in income each year-roughly equivalent to Indonesia's GDP.
That is not the worst case. Plum researchers also found that 7.5% of all small business invoices must eventually be written off as bad debts.
So what impact do late payments have on construction businesses?
First, when a small construction company does not get its payables, it is more vulnerable to damage than a large company with large cash reserves. The most serious area of concern is cash flow. Because when money is tight, it is difficult for companies to survive.
Second, late payments not only disrupt cash flow but also prevent contractors from making payments to their suppliers, subcontractors, and even employees. This may result in loss of payment discounts (hence higher cost of goods), and stricter payment terms with suppliers in the future, which may mean that suppliers need to pay earlier, or even need to pay in advance, which negatively impacts the contractor’s cash flow further. Of course, non-payment of suppliers, subcontractors, and employees will disrupt the work of the construction project, leading to delays and creating a sense of mistrust between the affected parties. That’s why late payments are every contractor’s nightmare.
Third, business owners will have bad credit ratings and impact capability in future credit facilities because business owners cannot meet your creditors' needs. Late payments for credit card bills or loans can cause a company’s credit rating to drop because credit bureaus will consider delays in payment when assessing your credit score. If the credit score is low, obtaining credit facilities will be more difficult and costly in the future.
Why are so many payments late?
We know that sometimes due to disputes between the payer and other payers fail to deliver the funds in time. Here are some of the most common reasons payers explain late payments to businesses:
Did not receive the invoice
Invoice payment is pending
Disputing invoice amounts
Wanting to pay invoices in particular periods of the year
How to Get Paid Faster On Every Construction Project?
Late payment and non-payment may be the biggest cause of the bankruptcy of construction contractors. Paying on time is essential for every business. Although some reasons for payment delays are beyond the contractor’s control, there are specific steps you can take to ensure faster and more reliable payments from customers. Here are some tips for business owners:
TIP 1: Select your customers carefully
Carefully selecting potential customers is a good method to reduce the risks of payment problems. Do a background check on the parties you intend to work with. No matter what role you take, a general contractor or a subcontractor, you should always research your customers’ payment practices, their financial & credit history. Ask the property owner to provide you information about the finance source(s) used to fund the project or find out about the general contractor’s previous payment performance are very helpful in letting you know if they have a strong financial source to pay for your work.
TIP 2: Optimize your contract, estimate
Although the verbal agreements still technically constitute a construction contract, the details cannot be proved. Can you work without a written agreement? Yes, you can. Is this a good idea? Definitely No.
A contract is essentially a promise. You are promising to provide quality labor or materials, while the homeowner is promising to pay you for it. However, it is important to be clear about the expectations of all aspects of the contract. The agreement should accurately outline what and when you will provide. It should also show how much you will be paid and when to pay. Every construction contract should include payment terms that can be agreed to by both parties. In addition, you should be aware of the consequences of delayed payment. Will interest be charged for late payment? When does it apply?
In general, the following items should be included in the construction contract:
Title and project description
Materials and equipment list
Add-ons and exclusions
Another way to ensure that you and the clients are on the same page is to provide estimates for the project from the beginning. An estimate on a construction project usually includes:
A breakdown of the work you plan to do
How long it will take to complete
How much you think it will cost
TIP 3: Create an information sheet about the property and other parties
Before the start of the project, you’d better gather essential information about the property, the project, and the person responsible for the project. This information is what you will use to prepare the preliminary notices, payment applications, lien claims, etc. If you’re in a payment dispute, it will be hard to get such information. Make sure you create an information sheet for each project so that you can collect the sufficient information you need.
TIP 4: Notice to Owner at The Start of The Job
Tell the owner of the job site, the work or materials being provided, the estimated value of the work, and the time when the work started. Although the notice to the owner has many uses, the most important use at the beginning of the project is to inform the owner of your name so that they can ensure that progress payments are made appropriately and correctly. Many states also require a preliminary notice at the beginning of the project to maintain or maximize the construction lien rights. These notices are usually not intended to notify the owner of unpaid items.
TIP 5: Send Invoices for Progress Payments
You generally can't get paid unless the owner or contractor knows how much to pay you. One of the easiest ways to get paid faster in construction is to submit payment applications or invoices on time and with as much detail as possible. The more accurate detail contained in the invoice, the harder it will be to refute. Many applications for payment are rejected because they contain incorrect completion percentages, incorrect math, or applications that are submitted tardy.
Make sure you invoice on a timely, regular basis. Invoices are usually sent by email, registered mail, or private courier company. You may include a return envelope on the invoice to encourage timely payment. If your contract requires invoices every thirty days on the fifteenth of each month: make sure those invoices are submitted to the owner or contractor on the fifteenth of each month. If there is no specific agreement on the timing of the payment request, it should be submitted regularly (preferably monthly), unless otherwise agreed.
TIP 6: Make a Phone Call Reminder
You would never know sometimes a persistent problem can be solved simply by a phone call or some phone calls. Though it is not encouraged to use often to replace documented requests for payment, phone calls could give you more good results than you might expect. Keep your conversation light and friendly. Last but not least, remember to confirm the details of your conversation (e.g. the person you talked to, expected payment date, amount to be paid) via email or written note later.
TIP 7: Send Lien Waivers
One of the reasons for late payments in construction is the payers have significant difficulties in controlling their risk of liens and double payment. Lien waivers could help to solve this issue, therefore may secure faster payment when they are used properly. Lien waivers are a guarantee to the property owner that you are not going to file a mechanics lien against their property. There are conditional waivers and unconditional waivers that can be used for partial payments or final payments.
Although lien waivers could be a good way to speed up construction payments, be very careful when you decide to waive your lien rights before you actually receive payment.
TIP 8: Send a Reminder
A reminder could be any written notice like a formal letter or email, an invoice reminder. Some people do not take this type of reminder seriously. Though they are simple documents, they could be highly effective in helping you to get paid faster. Make the reminder concise, friendly, and non-confrontational. If you have a system in place, set up automated invoice reminders for your open invoices at a specified time you want e.g. xx days after the due date.
Automation is a good tool that can solve many problems such as:
Anxiety and confrontation especially when it is your loyal or important customers who you need to contact.
Reduce time and energy spent on drafting & sending emails to a considerable amount of customers.
Eliminate the stress when the payments are due and/or when deadlines come pouring in.
TIP 9: Send a Dunning Letter
A dunning letter is a stronger invoice reminder sent to the customer when the payment due date has passed. It is actually a demand for payment following gentle reminders to which the customer continues to have no response. An effective dunning letter should contain the below critical information:
The amount due and any late payment fines or interest penalties
Your credit policy or law references supporting your right to take action
What you’re going to do next
It’s important that you made it clear about your credit policy from the start of the project so that your customer is well aware of it & won’t be offended.
TIP 10: File a Mechanics Lien
You all know a mechanics lien is a legal claim against a home or other property. Though property owners do not like it, a filed mechanics lien is a strong motivation for them to resolve your payment problem.
Mechanics Lien should only be used as a last resort when all other methods you tried are not effective. Each state has laws stating the limited amount of time a mechanics lien can be filed. Therefore early consideration should be made otherwise you would not be able to file it at all.
In most states, mechanics liens are applicable to private residential or commercial works. For public projects, a bond claim is needed instead.
Therefore, it is crucial for businesses to manage their collection process, ensuring on-time payments from the customers. Maintaining a healthy balance between incoming and outgoing payments can be key to a small business’ success, but late payments and the cash flow problems they can cause make it hard to do so. If your business sees a large number of late payments, don’t give up and write them off as bad debt. Pursue the payment and establish your reputation as a business that takes contracts seriously. Doing so will help you collect much of what’s due to you, while also minimizing future issues.
Irvine Bookkeeping is a bookkeeping and tax services firm, we provide accurate and reliable accounting services to help our clients to have better control and knowledge of their company finances. At Irvine Bookkeeping, we are working to save your time and money. Once you are free from financial troubles, you have more opportunities to grow your business bigger and stronger.
If you, as a business owner, see that you cannot handle accounting on your own, consider hiring an accountancy service for contractors to help you with it.
Call Irvine Bookkeeping now for a Free Quote!
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