According to a 2019 report, which surveyed 184 general contractors and subcontractors across the United States, slow payments cost the construction renovation, remodel and restoration industry over $64 billion (!) last year. 43% of the respondents said that they have to wait between 30 and 60 days for their payment. For another 30%, this figure rises to more than 60 days. Yes, the industry is notoriously tricky in the invoice paying department, no news there. Getting paid as a residential contractor can be a headache and, as we all know, not getting paid on time wreaks havoc on your cash flow, in times of Covid-19 now more so than ever. However, sticking to a few key rules that revolve around communication, documentation and making use of the legal safeguards available can go a long way in ensuring that late payments are the exception and not the rule.
Getting paid as a contractor: Put everything in writing
This may sound like a no brainer but very often, insufficient documentation turns out to be a stumbling block when it comes to getting paid. Especially as an independent contractor or subcontractor. From day one, make sure that you keep records of everything related to your invoicing. Should you, as a contractor, end up in a payment dispute with a homeowner or, as a subcontractor, with a general contractor, the better your documentation, the easier it is for you to prove what has been agreed on and that you have done your work and done it on time. This might sound like a slightly negative approach but in the context of getting paid, it is always better to be safe than sorry.
On top of a detailed documentation you should consider the advantages of using easy to understand visuals to communicate details with images and information in context. This way you're limiting the room for misunderstandings with homeowners, insurance adjusters or carriers.
Documentation also means that everything, including the conditions for payment, should be put into writing. Essentially, you need a credit policy which lays out how and when you will collect payment. This kind of procedure helps you establish clear rules from the start and communicates clearly to your client what to expect in case of late payment. A written contract for any work undertaken is therefore also a must. Verbal agreements are, in theory, also contracts but it is never advisable to rely on those alone. Ultimately, a written contract underpins the promise that both sides of the equation make: Contractors deliver a specific job in a certain time and quality while homeowners commit to making payments according to the terms laid out. In this context, it is worth considering types and details of payment, which might have a positive impact on overall “payment morale”. If you can get your customers invested in the projects from the start, e.g., by paying for an estimate or putting down a deposit, they are more likely to be committed and not fail on payment.
Client management is key: Never fail to communicate
Again, we are banging a drum that seems very obvious but we know from our experience working with contractors in residential remodeling, renovation or restoration, that insufficient and/or unclear communication are more often than not the linchpin in this very specific supplier-customer relationship where details, frequent changes and not everything always going according to plan play such an important role. Ultimately, anything related to payment is part of your client management –and client management is, essentially, about communicating. This applies in more than one way: On the one hand, share as many details as possible with the client before starting on and during the project. As soon as anything happens, that might, e.g., affect the agreed cost, which could then trickle down to a more reluctant and delayed payment, communicate and be clear about what is happening. Likewise, always share all cost details with other team members who are working on a project and update cost information in your system should orders change.
Client management is all about handling homeowner expectations. If you can clearly communicate what needs to be done and show the potential look after your job is finished, you'll have a much easier time to convince a client to get paid on time as a contractor. Additionally you increase clients' trust in your work and build up your reputation when you meet their expectations.
Using mobile software to create visuals on the first property visit like photos, 3D and 360° images, will make communicating a realistic outcome much easier because of less room for false interpretation. Presenting your potential result and what needs to be done in a digestible manner can also make the difference between getting or not getting the job in the first place.
Additionally, documenting job specs visually right at the beginning, provides for better planning and execution without constantly having to be on the phone with your field staff due to misunderstandings. In return you and your team save time, get the job done in time - for you to get paid in time.
Lastly, providing job estimates based on realistic material calculations right on the spot via mobile software, ensures a transparent understanding of the costs involved by the homeowner.
Read more: The benefits of specialized apps for renovation, remodeling and restoration contractors
Consider flexible payment options
Transparent and clear communication can also very early on in the negotiation phase contribute to avoiding later problems with contractor payment. This includes discussing flexible payment options that work both ways; for you and the client. Favorable conditions for upfront lump sum payments, progress payment at regular intervals, discounts for paying earlier – there is more flexibility than you might think, which will ultimately result in getting paid without hassle. You just need to address the issue openly, ask or, if approached by clients, be open to find viable alternatives without compromising your bottom line.
Use legal provisions that protect your right to get paid
The law provides for various tools and safeguards to ensure contractors getting paid. Use them. Integrating late payment fees in your contract is a minimum and putting such fees in your contract is not to be underestimated as an incentive for clients to not be late with contractor payment. Wherever you are in the US, your state will have statutes in place that protect contractors from not getting paid. One of the most important ones is the so-called mechanics lien law, which gives construction companies the right to file a mechanics lien in case of non-payment. It enables the contractor to hold a claim in the property which is subject to a home improvement project. To set off this lien process, contractors need to send a preliminary notice, as a general precaution and before problems arise. In some states, this is actually required by law but even if not, it might be worth considering in order to reduce payment problems.
In summary, the road to getting paid on time to protect your cash flow is a mix of following very clear processes around payment conditions and invoicing, making use of legal safeguards, applying soft skills throughout and using the right software: Communicate, be prepared to approach your clients openly whenever any payment issues arise and use your common sense. Resorting to legal means to force payment and ending up in court with a client is the worst-case scenario that everyone in the business would want to avoid. However, even if you have a well-established payment process in place, there can never be a 100% guarantee and things could always go wrong. Nevertheless, adhering to the key factors described will put you on a solid base to successfully manage how you get paid.
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