Profit Building: How contractors can get paid much faster
by David Flaherty | 4 September 2024 1:54 pm
The construction business used to be easy. All you had to do was bid, build, and bill. Submitting bids that were clear, complete, and competitive would win you more jobs. Doing high-quality work, according to the plans and on time kept customers happy. When you submitted your invoices or bills in a timely manner to customers, generally you got paid quickly. But what happened? Now, it sometimes takes 60 to 90 days or longer to get paid on monthly invoices, and often another six months or more for the final retention payments. Customers can run out of money before projects are finished, as conflicts, problems, added city requirements, utility company charges, upgrades, or delays can cost additional money. Also, construction loans often do not provide enough money to handle every change order, upgrade, or unforeseen field conflict.
Be firm but fair
Getting paid is not easy. The old way of submitting a simple bill and getting paid within a few days is over. Collecting money owed to you by customers takes time, determination, detailed paperwork, and effort. Added requirements include specific payment forms and contractor and supplier conditional and unconditional lien releases. Additionally, approvals are required by the customer, the lender’s bank inspector, the owner’s construction manager, and/or the architect.
Many contractors have too much trust in their customers to pay quickly. Many may also be in a cashflow crunch or undercapitalized
to handle their workload with slower pay. They are often optimistic about getting paid without proper paperwork and required signatures on contracts, change orders, releases, and payment requests. When contractors are asked what their biggest challenge is, they often say “getting paid.”
Yet they often do not have any reserve working capital funds or a line of credit, have not filed a preliminary lien notice, and don’t stop work or place liens on projects when they are not getting paid timely or per contract. Since they do not want to jeopardize customer relationships, they usually do not provide payment demands or stop work notices, follow the payment terms of their contracts, and then continue to do repeat work for these same customers who don’t pay.
Train your customers
As a general contractor, I have learned you can train your customers. If you are firm, fair, and tough, you get more respect and are paid faster. If you are soft and do not demand payments to perform, you get overlooked and must wait for your money. Tough contractors never do extra work without signed change orders, and they always place liens on projects when they don’t get paid. They usually get paid first, and their change orders get signed before they start any extra work. Train your customers by teaching them to follow the contract and how you expect them to do business.
Rules to get paid faster
Rule 1—You can collect only if your customer has the money. Always verify your customer has enough money to pay you. Before starting a project or doing extra work, insist on proof of funds by reviewing the loan documents or calling the banker to verify funding is plenty and available.
Rule 2—You can only collect if you are owed the money. Before starting any work (or doing extra work) get your customer’s written approval and signature to perform. Never do work without proper approval.
Rule 3—You can only collect if you invoice or bill according to your contract. Experience shows half of invoices contractors submit are rejected the first time because they were not prepared according to the contract terms and documentation requirements. Always invoice on time, use the right billing format, and include all the required lien releases from suppliers
and subcontractors.
Checklist for faster payment
- Always send timely preliminary lien notices per your laws on every project—no matter how small.
- Your invoices must include all the required paperwork, cost breakdowns, and lien releases.
- Never bill for unexecuted or unapproved change orders you have performed as part of a monthly progress payment request, as it will not get approved or paid.
- Submit separate invoices for change orders not yet executed. Customers often pay for small change orders on a separate invoice with a clear and detailed cost breakdown of the work done.
- Make collecting money a priority. Follow up and be persistent. Have a mandatory Monday morning meeting to review all accounts receivable, make action plans, and follow-up plans for delinquent accounts.
- Call or visit slow-paying customers at least once a week to check on unpaid invoices. Also, make sure you are talking to the
right person. - Notify customers of your intent to stop work and/or file a lien unless paid per the contract. Fax, email, or send a certified letter of notice as soon as your money is more than a week overdue. A firm but friendly written warning will get the customer’s attention and oftentimes result in immediate payment. Also, send a copy of the warning to the project owner or lender, as they do not want to see their contractors being unpaid.
- Never give up your lien rights. Always file a lien when you do not get paid according to the contract.
- Always file lawsuits quickly per your laws to collect unpaid long overdue invoices and liens. Be prepared to start legal proceedings within 30 days after filing to speed up the collection process. Usually, this action alone will make payments quicker.
Suggestions for getting paid faster
Even if you bill according to the contract and your customers have the money and execute all the necessary approvals, you may still not get paid as fast as you want. Some contractors are also underfunded, have cash flow problems, and are using their money to pay other expenses. Try offering a three percent to five percent discount to get paid in full within 10 days without retention. You can make special deals, such as faster completion or reduced prices, in exchange for better payment terms. Some contractors specify no retention, or only 50 percent retention when the project is 50 percent complete. Likewise, payments every seven days, payments in advance, a five percent penalty if not paid within 10 days, or payments upfront for materials. You can also charge interest or late fees for slow pay if agreed to in your contract.
You are in business to make a profit
It is impossible to build a business without getting paid. When you don’t get paid on time, doing good work will not keep your doors open. To get your copy of George’s ‘Project Management Forms for Contractors’ email GH@HardhatBizcoach.com. Train your customers by insisting on prompt payment. Do more than bid, build, and bill. COLLECT!
George Hedley, CPBC, is a certified professional construction business BIZCOACH, consultant, and popular speaker. He helps contractors build better businesses; grow, profit, develop leaders; improve estimating and field production; and get their companies to work. He is the author of Get Your Construction Business To Always Make A Profit—available on Amazon.com. To get his free e-newsletter, start a personalized coaching program, attend his webinars and workshops, or get a discount on his online university for contractors, visit his website at HardhatBizCoach.com, watch his videos on YouTube, or email GH@HardHatBizCoach.com.
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