Collecting From Contractors
Ideas about how to make sure you get paid by a general contractor. May 5, 2007
Question
I am the accounting manager at a medium sized architectural millwork company who specializes in commercial cabinetry. Not only am I new to this industry, but I am also new to the role of collecting payments for a business. I am wondering if any of you have problems collecting payments from your contractors. Basically, I am being faced with situations where certain contractors claim they didn't receive our invoices, or the releases that go with them, or they claim they themselves have not been paid, therefore they cannot pay us, etc. What tools, as an accounting manager, do I have to use in collecting our revenue? What are my rights, and how can I light a fire under my contractors to get us our payments?
Forum Responses
(Business and Management Forum)
From contributor S:
If you are new to this business, I must first inform you that many contractors are absolutely relentless in trying to get out of paying their bills. Not all, but many! The most powerful tool I have found is to send an "Intent to lien" letter by certified mail. Be sure to send a copy of the letter to everyone involved, including the contractor, property owner, and any other partners or investors that may be involved with the property at hand. If the threat does not do it, follow through and actually put a lien on the property. This way, you are guaranteed to collect your money, with interest, whenever the property is sold. If your lien is the only one, or constitutes a certain percentage of the value of the property, you may even be able to have the property seized and sold at auction. I never went as far as to seize a property, but once I notified a property owner of that intention. The deadbeat contractor hand delivered full payment, with interest, in a matter of hours.
Check the laws of your state before doing anything. Consult your attorney and CPA to find out if these tactics are true and legal in the state you are in. If they are, use them - they work!
From contributor L:
We have partly cured this problem by not bidding to those contractors that practice the typical GC payment plan. When we have had trouble with a contractor, we notify the construction company owner of our payment policy and that they have a history of failing to pay on time. We tell them we will no longer be bidding to them. We still bid to our selected list of contractors and still get a reasonable amount of work without the BS that goes with many GCs. Most of them don't care, but a few have come back to us and agreed to 30 day payment terms. I will use the lien laws, but they are weak at best.
From contributor J:
As a matter of practice, you can file a lien on all projects and then issue a partial lien release as payments are received. Then file a final release when all payments are received. Compare this practice with any state and local laws that may regulate this practice, as well as any contracts that are signed. By the way, any contracts that are issued by the GC are always designed to protect their interests and deny the subs' interests. In other words, most contracts signed by a sub place him in a disadvantage. If it can in any way be avoided, don't sign a GC's contract. Also, follow contributor L's advice.
From contributor D:
Welcome to the wonderful world of dealing with builders. How you handle these birds will need to be determined broadly by your employer, but it is wise to develop a strategy and hierarchy before the point of sale so there can be no excuses.
One tool is to offer a 1% or 2% discount for payment in 10 days or so. At the other end, you can add a similar percentage penalty for late payments. Many builders are greatly entertained by the idea of late payment fees - they really laugh at them. I wonder how that works for them with the IRS or their cell phone provider.
The best thing to do is to send them a credit application, just as your company does to set up with your vendors. This will include a personal guarantee, and spell out the terms of sale. This way they know the story, and must (legally) accept your terms and pay late fees - just like the electric utility - or not do business with you. Takes it all to a level of professionalism that is well above preemptive liens or leaning against a truckload of cabinets with your hand out.
While you don't want to scare them off, this will separate the real business people from the "checkbook" builders that are just looking for the next cheaper deal. There are builders that will shop until they find some guy with sawhorses and a table saw, and ask him if he'd like a $60,000 job, then push him to the point of breaking to get an $85,000 job done for $60,000 or less.
One other great strategy is to contract with the homeowner if you are doing residential work. There are other benefits in contracting with the owner, but it takes the alleged builder right out of the loop and relegates him to a contact person instead of god. "I can't pay because the owner hasn't paid me." I love that one.
From contributor J:
Don't offer an early pay discount. It will only be abused. If you think you can't collect prompt payments in the first, how do you expect to collect unearned discounts and late fees?
From contributor L:
We tried the 2% discount for 15 day payment, and they always took the discount when they paid 90 days later!
From contributor D:
Regarding the two previous posts, if you have a signed personal guarantee, then you run the interest clock on them and let the money pile up. Quickbooks does this very well. This will hold up nicely in small claims court - just keep track of your requests and any activity for the court. Let the deadbeats laugh. If they will not sign a personal guarantee, that is one big red flag that they intend to not be fair with you.
The only reason a customer abuses a discount or penalty is because they think they can push you around. Then they abuse it and you allow it. This is not business, it is exploitation. Business is a fair two-way exchange; exploitation and intimidation are not part of good business. Do not confuse a person with work for your shop with a customer. A customer agrees to and will pay your bill.
And good luck. Lots of folks in this business are afraid to talk to their customers about money, and in larger companies, the salespeople may gloss over some of those details that become very important at collection time. Keep it professional and proactive and you will have very few problems. In 17 years, I have been beat for a total of $640.00 on nearly 5 million, and I've never seen the inside of a courtroom or hired a lawyer.
From contributor J:
Very few GC's are going to sign a personal guarantee, even those who aren't deadbeats. I would never sign a personal guarantee, and my business has an impeccable credit rating after 30 years in business.
"Business is a fair two-way exchange."
Except for GC's - if it were fair for them, then we wouldn't be having this discourse. For no good reason that I can think of, the construction industry operates under a different set of rules than most industries.
From contributor D:
I agree that there is a different set of rules for a segment of the industry. There is no good reason except that the GC system relies on a steady stream of new and hungry subs wanting - needing - to work. By definition, these new subs will not know all the ins and outs and will be ripe for exploitation. Many of these subs are in business not by intelligent selective choice and planned execution, but due to failed drug tests, firing, or other calamity of their or someone else's making. In my area, there are no contractors that offer contracts, and no subcontractors that sign contracts - it's all a ruse.
However, I don't know how I could ever get access to the best materials and prices without a personal guarantee. While I don't do many now, at least with regional suppliers, a weatherstrip manufacturer on the West Coast has no recourse other than a signature and credit references. I think you will find that the small business cannot survive without signing a personal guarantee. I know that lumberyards will not ever let anyone get by without a personal or corporate guarantee. In fact, the notion that one need not ever sign one seems to put one in the category under discussion. Nothing personal, but do you see what I mean?
When I do run into a guy that balks, I'll let my gut feeling take over and negotiate terms that are mutually agreeable. Or walk. The ones that I walked away from either turned out bad, or came back later on my terms with no regrets either way.
From contributor C:
Why would anyone who's a corp want to sign a personal guarantee? One reason you are a corp is to separate your business from your personal. I spend over 100k a year in purchases and have never given a personal. I always pay my bills, and in twenty-five years, have never stiffed anyone. I think it makes sense to keep business and personal separate, and any reluctance I would have in signing a personal guarantee should not be taken to mean I might not pay. No offense, but I think you have it wrong. Would you put your house on the line - or the security of your family - to personally guarantee a business purchase?
From contributor L:
I've been asked for a personal guarantee a few times, and always ignored the request. I have accounts at many of the major national suppliers. When we fill out the app for a new supplier, they always ask for references. We have a file of all the major suppliers we do business with and a disclosure statement that we send back with the app. Never been turned down. Back when I needed a line of credit from the bank, I had to give a PG.
From contributor A:
There is a designer here who uses new local shops only when her feet are to the fire and needs work done fast. I fell into it when I first opened, then discovered she was almost impossible to collect from. I'd send an invoice, wait a month, call for payment. Her bookkeeper would always claim she had not received the invoice. So eventually I learned how to collect. I would create a new invoice for $100 more than the original one and fax it over. Within a few days I would receive payment - for the original amount. She had not lost the original invoice at all. She was playing the move the money around game. I won't bid for her at all anymore - too damn much trouble, too much work, not enough money.
From contributor D:
Maybe I do have it wrong. I just never could picture a scenario where I would not pay for goods or services rendered, so had no real problem signing my name to a credit ap. I assumed it was good business; it certainly greased the wheels of commerce, and posed absolutely no threat to me. We are now an S corp for many reasons, but it doesn't present the impenetrable wall that corporations used to enjoy. The "incorporate to protect personal assets" strategy is not the major motivator it used to be.
I also keep business and personal completely separate, and cannot see where I would put the house or non-business assets on the line. I do not see how refusal to sign a personal guarantee conveys anything other than the potential of a problem. Maybe it's the chicken and the egg: If you pay, there is no problem; if you sign, there is no problem. So which comes first?
In the questioner's case, depending upon the size and nature of her business, it can be a useful tool for laying a solid foundation of good business. If her files are full of signed credit apps, she checks references, and her company's invoicing is clear and timely, then she has everything in place to ease her job of collection. Too many companies wait until there is a problem, then wing it in an unfocused and unpredictable manner. She is trying to be proactive, and if she does her due diligence, she'll be fair to everybody, with no surprises, and no problems for her or her company.
This will certainly present a far more professional level than pre-emptive liens, struggles over payments and deliveries, and the inevitable legal fees. As contributor L noted, lien laws are problematic, and any good legal counsel will first counsel against legal counsel. If the slow pays have no access to your products and you are tops in your market, then they will suffer and either come around to your terms (per contributor L's experience) or do without the benefit of your products. Take the high road and make it easy.
From contributor C:
I do see the points you are making, but the problem I have is your impression that not wanting to sign a p/g can only mean potential trouble. Sure, in a perfect world, your business should pay its debts, and it should never encroach on your personal assets. But aren't you exposing those assets when you sign a personal guarantee? What happens in a worst case scenario when your business somehow loses its ability to pay its debts, then the creditor seeks payment from your personal assets? I'm not talking fraud or anything sinister, but most businesses have ups and downs, and if something unfortunate happens when you're down, your personal assets can be attached if you've signed a p/g. Isn't it more prudent to not sign one? This way, if something happens out of your control, then at least you can try to deal with it honorably, but not with a knife at your throat, as you might feel if your house or family were in jeopardy. Anyway, this line of thought can be behind a refusal of signing a p/g, not a desire to rip the other guy off.
From contributor H:
I have found that the best way to collect is to call every day. I usually don't have to do this, but sometimes I have a hard time collecting, so I call every day, at least once, until I get paid. Usually the builder will get tired of answering my phone calls and tell me that I will get a check next week. If the check doesn't come, then I don't stop calling until it does. Even if the builder tells me something like, "Oh, my wife must have not mailed it - I will check and give it to you next week," I call every day until I get the check. I will usually say something like, "Hey, just wanted to call and make sure that we are on schedule for my check next week". One thing that is very important is to be nice all the time. It doesn't do any good to get the guy mad at you - he won't pay faster if he is mad at you.
From contributor U:
As others have stated, contractors are the worst when it comes to paying. In most cases, I am working directly with the homeowner. I had one situation where the contractor held onto his money. This is a large corp in the southeastern PA region. Even though my contract was signed according to my terms (50% down, 50% at completion), the corp decided to take its time paying. After several calls (and weeks), I finally saw a check. However, I hired two separate subcontractors to help me keep my installation schedule (due to the fact that my wife went into the hospital for a week and I cared for the children). I completed the project on time, paid my subs on time, and "earned" a $16,000 bill from the hospital. Still I received no payment. I am contemplating billing them for the subs' bills that I paid, because of their practice. The only way I will do business with them again is to receive 100% of the payment before even scheduling and purchasing supplies.
By the way, this company is a multimillion dollar company that funds its own charitable organization. It's a crying shame that a company that seeks to do good for the less fortunate treats those who make it successful like dirt. As for myself... I pay for my supplies when I pick 'em up. Cash is best.
From contributor O:
To the original questioner: Seems like you need better customers, but since everybody seems to compare prices against the large home centers in my area, I figure the same payment plan should work also, which is pay and then we'll order your stuff. Hey, if you want to compare me and complain about prices, then pay like they require.
From contributor Y:
Why not report the contractor for late payments to the credit reporting companies? I'm sure they like their credit scores to be up there, even though they're not worth the numbers they have.
From contributor V:
1) Provide your boss with an A/R aging report.
2) Ask the contractors what their draw schedule is, and invoice for work that you project to be completed by the time the invoice is funded. Let them know that this is your policy, if it is okay with your boss.
3) Communicate with the dog ate my homework bunch. Call to make sure they received the invoice - that takes away their excuses
4) Call as soon as invoices become past due. I call that day.
5) Keep a work log. You'll probably find that the 80/20 rule is in effect. 20% of your clients take 80% of your time.
Most of my slow pays are the largest companies. I don't know if slow pay is part of their business plan, but I generally know who is going to take 45-60 days to pay and I price accordingly and I let them know what I'm doing. The other thing that I guess is going on is your slow pays know that they can get away with it with your company. If you stay on them, it will get better, but the problem will never go away.
From contributor Z:
We have the unique perspective of wearing the architect hat, the construction manager hat, as well as the millwork/cabinet provider on several jobs. There is a huge difference in commercial vs. residential contracts and collections. The deadbeats usually fall in the homebuilder category. To find a collection solution, first look at the reasons for slow payment. In nearly all cases, you are not paid in a timely manner because the contractor simply does not have the money left at the end of the job. This is sometimes due to incompetence and bad management, but more often due to the contractor's problems with the work and delayed payments to him. He has his own set of collection problems with his final payments. Unfortunately, the cabinets come at the end of job when any of the contractor's problems catch up with him. Final payments to the contractor are often delayed pending corrections of non-conforming work. That's his problem but it gets passed on to whomever else is in the food chain.
At contract negotiation, you are holding the cards. If he can't get you to sign, he has to go to the next highest bidder. That puts the ball in your court and you can insist on contract language to help you collect. Don't offer a discount for timely payment. Charge 29% interest on all payments over 5 days overdue and make payments due 10 days from invoice date. Do not work for a lump sum at completion of the install. Make monthly pay requests just like he does. If, at the end of the month, all you have is stacks of material, bill for it. Get progress payments and don't wait till the end. There is less at risk that way and it's actually easier on his cash flow. Never enter a contract that makes your payment conditional on his receipt of payment from the owner. On the fifth day he is overdue, call him and tell him that you automatically file your first lien letter on the sixth day. Then be sure and send it on the sixth day. Just send it to him with the promise to forward a notice to the owner in five days. Possession is 9/10ths of the law and if he misses repeated requests, and the owner is not occupying the building, go take all the doors and drawers out of it. Legally, he could likely make you put them back, but it would take weeks and this gives you a great deal of leverage. If the guy is shady, make it part of the agreement.
People don't realize that collection relationships happen when you sign the contract, not when you finish the work. If he is hesitant about anything which insures your payment, walk away. That means he is already thinking about not paying people.
Also use a contract clause that allows you to bill for all costs of collection including courts, attorneys, arbitration, mitigation, your personal and staff time, as well as liquidated damages.
