There’s nary a construction company in business that hasn’t had difficulty collecting monies owed for a project. In many instances, a contractor may be tempted to write off the bad debt, rather than spend time and effort trying to collect those dollars.
The owner of a midsize masonry company, who was facing this problem, noticed a trend in his protracted payers. He often found it difficult, if not impossible, to collect the last payment of what he was owed.
Some owners questioned his billings or kept adding punch list items. Others simply stopped communicating and, eventually, outright refused to pay. Tired of being stonewalled on his final payments, he sought help from his financial advisor.
Three ways to get paid
The advisor acknowledged that, in just about every industry, there are going to be clients who try to take advantage of service providers. In addition, he agreed that, in rare cases, it’s acceptable to simply walk away from a bad debt and hopefully write it off on your taxes.
But the advisor also made clear that no one should ever be comfortable leaving money on the table job after job. Right off the bat, he offered three ways to improve the contractor’s chances of getting paid:
- Craft the contract. The contractor should draft his contracts to limit final payments to 2% to 3% of the sale price. He should also ensure the contract explicitly states that the owner will be responsible for costs incurred to collect amounts due on the job — including attorneys’ fees. And he should add a clause that a lien will be filed if the owner fails to follow the established payment schedule.
- Be absolutely clear. The advisor recommended sending a notice of intent to lien on the day before work begins. The contractor should advise the owner to expect this notice before signing the contract, so it won’t come as a surprise.
- Document everything. The advisor suggested taking job-site photos from estimate through first day of work to completion. The photos should leave no doubt that the masonry company completed the work agreed to in the contract.
Sending a signal
“Including these provisions and taking the steps mentioned will signal to owners that you’re serious about being paid what you’re owed,” the advisor said. “It also lays the groundwork for you to take legal action in the event of failure to pay.” Indeed, after making the suggested changes to his contract terms and procedures, the contractor’s final collection woes eased considerably.
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