Getting paid can be hard for any business, but getting paid in the construction industry is especially difficult. Construction industry businesses do an excellent job of prioritizing AR management- they’ve learned that a strong receivables management program is crucial to getting paid, and getting paid on time. All kinds of businesses can learn from the best practices of the construction industry to tackle non-payment and AR management by risk-shifting mechanisms in contracts, and knowing the ins and outs of the security rights that are available.
I. The Foundation of Risk-Shifting Contracts
Many factors contribute to the difficulty of getting paid, and paid on time, in the construction industry. Scope of work issues, inspection problems, change order dispute, pay when paid or pay if paid clauses in contracts, and some of the highest failure rates of any market all play a part.
Long-standing public and legal policy is that trade contractors and suppliers should be paid for their work, even if they did not fully complete the project. The possibility of project abandonment or other factors that could derail a project put many different industries at risk for non-payment. No business should be held to an “all or nothing” payment mentality. Many business’ can learn from the construction industry’s tactic to ensure they get paid, even for partial projects by utilizing “the mechanics lien instrument”. This concept is that subs and suppliers should be protected from bearing the burden of non-payment on construction projects.
Mechanics liens work to protect parties on a construction project in many ways: by obligating more parties to pay, by demanding the attention of the owner and lender, by causing a breach of contract, by prioritizing certain invoices, and potentially most importantly, by encumbering the property itself. An unpaid mechanics lien claimant is able to initiate a lawsuit to foreclose on the property itself, and have the property sold to satisfy the debt. Because of this protection, and the public policy idea that subs and suppliers should not be forced to bear the risk of nonpayment – that risk was pushed up the payment chain to the property owners and general contractors. Property owners and GCs don’t want to shoulder financial risk any more than sub and suppliers do, so they fought back with contract provisions specifically designed to force risk back down the payment chain.
Utilizing automated technology like Zlien to manage security and lien rights also drastically improves the success rates of construction industry businesses.
What Your Business Should Do:
- Ensure that your contracts fully cover you in the event of project non-completion. Include a paragraph that dictates “In the even of project non-completion, payment will be expected in line with work completed”. Be sure to verbally let your client know that you will expect payment for the work that you are able to complete, even if the project is never completed, for any reason.
- Have as many parties as you can sign the sales contract, especially including the person in charge of accounts payable.
- Break up the project into different invoices, due a varying intervals. This means, your time and work during the first week can and should be invoiced upon completion, as section 1 of your work on the project. This will help you avoid one large unpaid bill, at the very end of the project.
II. AR Management In the Construction Industry
Construction industry businesses are more likely to utilize have digitized invoicing software and AR management platforms, both of which significantly increase their efficiency and ability to handle a large volume of invoices and clients.
With digitized records, human error is less likely, and it gives the AR manager the leverage of being able to cite specific dates, details, and contracts in their collections communication. AR management platforms (such as the FG Receivables Manager) allow for maximum insight into the progress of each invoice’s payment (or lack thereof). Most AR management platforms also come pre-loaded with collection emails, so communicating with clients can be done quickly without sacrificing quality. Typically, construction industry businesses are diligent in immediately following up with a past due invoice, which increases the likelihood of successful payment.
What Your Business Should Do:
- Send smart invoices
- Track invoices with your accounting software and an AR management app
- Be diligent with your AR management and collections communication
III. Resources for Tackling Non Payment
- Collection Letter Templates
- Action Plan for Common Late Payment Excuses
- The Small Business Owner’s Guide to Receivables Management