Michael Bignold | Construction Executive
Sales are important for construction companies that want to succeed. However, while companies certainly need to spend time on sales and marketing, having a full order book is only part of the equation. They still need to do the work and, even more importantly, they need to be able to collect payment from customers.
Here are common payment issues in the construction industry and what leaders can do to prevent or mitigate them.
1. CHANGE ORDER DISPUTES
If a project goes exactly as planned and quoted, billing the customer is a fairly simple matter. However, it’s very rare that any job goes exactly according to the quote in the construction business. Change orders, omissions and additions are typical on jobs of any size across the industry. If contractors are not handling those changes properly by getting everything in writing, they could be in trouble when the time comes to send invoices.
The Solution: Make sure every change made on any job is documented in writing and that the client or someone who is authorized to represent them signs acknowledgment of the change. This might not be guaranteed to stop disputes, but if you have to take legal action, it will give you the proof needed to ensure payment.
2. ‘THE CHECK IS IN THE MAIL’
If you have ever spent time following up with clients on your AR list, you know how common it is to be told a check has been mailed. You might believe the customer the first time; when it’s been weeks and they keep saying the same thing, there’s a problem.
The Solution: These days, it’s very simple to set up online payment systems, which will allow customers to pay invoices instantly online with a debit or credit card. This helps to ensure that you are not waiting for checks that never arrive and saves customers the hassle of writing and mailing them.
3. HOLDBACKS AND BONDS
In commercial and industrial construction, holdbacks are a common part of nearly every project. Clients will retain between 5% and 10% of each progress payment, and the money will only be released when the project reaches substantial completion. This helps to ensure contractors complete the project as quickly as possible, including any remedial work—but it does mean that you won’t get full payment until you’ve completed the job to the client’s satisfaction.
If the contract has a bond requirement, whether it’s a performance bond or something else, you will also have money tied up with a bonding company until your client releases it.
The Solution: Make sure to read any construction contracts carefully and pay close attention to any bonds, holdbacks and other financial issues that will affect when and how payment will occur. Then make sure to add an additional markup to cover the cost of any bonding needed to get and to compensate for delays in getting money that is held back.
4. NONPAYMENT
It’s every contractor’s worst nightmare: You’ve bought the materials and done the work, but now the client has disappeared, and the contractor has not been paid. While this is, thankfully, not the most common payment issue in the construction industry, it does happen, and it can put contractors in a dire financial predicament very quickly.
The Solution: The first thing contractors need to do to protect themselves from nonpayment is not to give credit to anyone without running a credit check. There are still situations where customers who are usually great payers run into a situation that makes them incapable of paying—but, in most cases, their credit report will show a history of slow or nonpayment.
Take deposits on projects to cover the cost of materials purchases upfront and use progress billing to ensure there’s never more than a month’s worth of work unpaid at any time. If the client has not responded to emails and calls, take action as soon as possible. Whether it’s taking them to small claims court or getting a lien on their property, you have limited time to take legal action after a client fails to pay.
5. PROJECT AND CONTRACT MANAGEMENT FAILURE
Often, payment issues in the construction world are driven by clients—but, sometimes, they’re due to a lack of project and contract management systems. Examples include crews that do additional work without getting the right paperwork; not billing for work that was done; and improper billing calculations. They can all happen, and they can cause a lot of trouble.
The Solution: Usually, poor project and contract management are not because contractors do not want to do things right—it’s because they’re just too busy and don’t have the right systems in place. Contractors must make sure they’re using the right software, from accurate and easy-to-use estimating software to accounting software and job-tracking systems. Make sure to have all the necessary paperwork templates for crews and that they know how to use them. As a company grows, leadership might also have to hire people to focus on this part of the construction process, so they’re always on top of everything that goes on on every jobsite.
A LITTLE PLANNING GOES A LONG WAY
Like everything in construction, payment issues can be prevented and mitigated by doing a little advance planning. If a construction business owner notices there are payment issues on several of its projects, it’s time to make changing systems and processes a priority. No matter how busy a contractor is, making time to address the root cause of these problems is the best thing to do for the bottom line.
Don’t wait until payment problems become a crisis. It might be too late to fix the problem once that happens.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.