Contracts and Collections

Owning a woodworking business is great, provided you remember it is a business. How to contract carefully, and get paid. 1998.

by Anthony Noel

It is one thing to write your own terms on commercial contracts, but what do you do when they are not fulfilled or, worse, when you are faced with having to satisfy unreasonable terms?

A reader recently asked for some ideas on how to handle commercial contracts and collections. I took this to mean that he is uncertain about dealing with wholesale customers in two senses: First, in establishing the terms under which to work for them and, second, about what to do when they don't pay on time, try to lower the amount they owe or just don't pay at all.

This reader certainly is not alone in his confusion. Commercial clients run the gamut when it comes to what they want in their contracts at the start of a job and what they will do about paying their bills at the end. Where running into the occasional slow- or no-pay retail customer is not unheard of, the number of less-than-scrupulous wholesale clients out there - those who will do anything to take a larger profit on the total job - is bigger, and they often view custom shops as easy marks.

Don't get me wrong. The vast majority of commercial businesses with which custom shops might deal are on the up-and-up. But unless you protect yourself from Day One with every general contractor, architect, interior designer and millwork business you contract with, you run the risk of being victimized by those who were in the bathroom when integrity was being handed out.

I once had the misfortune of consulting (specifically, setting up cost accounting and vendor relationships) for a company whose owner still had not learned the importance of making customers meet his terms. This, I would later learn, was in spite of being forced out of business once before for making the very same mistake.

About two months into his startup, things looked very good. The prices he was getting for work were allowing for a nice profit margin. The shop was humming. Jobs - big ones, for large clients, many in the New York market - were getting done on deadline. Workers were happy. Vendors were happy. Everyone was happy.

Then the third month hit. I sensed a kind of despair settling over the shop foreman. What was up?

Well, it seemed that this man had not been paid in weeks. He also told me that the word from the vendors' sales reps who stopped into the shop was that many vendors were not getting paid or that what they had been paid was a drop in the bucket of what they were owed.

To make a long story short, the owner was doing a great job of selling work, but getting paid for it was another story. A natural salesman, he could close with the best of them. He even had enough shop experience and mechanical aptitude to help iron out design flaws now and then. But he refused to put his foot down with slow-paying or game-playing clients. He seemed to so enjoy the schmooze, that he did not care how badly he would lose in the long run.

And in the end, of course, he did lose.

What was most painful was thinking about that aforementioned profit margin. Regular readers of this column know how highly I value accurate cost accounting as a profit-making tool. But even the best cost accounting can't squeeze profits from a company that is not getting paid.

So, how should you establish successful relationships with commercial clients, relationships that are sensitive to the clients' demands - which often include terms far more exotic than '50 percent in advance, balance due on completion' - without going broke waiting for payments on completed work?

The major weakness of the owner in my example was that he did not spell things out for slow-paying or game-playing clients. What do I mean by that? Exactly what you might think. This particular owner's customers used every trick in the book, from delaying tactics to 'back charges' to avoid paying their bills or to slow the process down to the point that his profits were chewed up in interest payments on other debt.

There is only one cure for that kind of bind and it is simply telling such clients that you will no longer do any work for them. Period.

But take heart. There are other techniques you can employ which will help prevent you from ever reaching such a drastic point.

The most crucial step is the contract itself. If you are about to sign an agreement that seems to give your customer legal loopholes to avoid paying you in a timely fashion, be warned: it probably does just that and he probably intends to take full advantage of the opportunity. The same goes for clauses allowing for 'back charges,' which are basically fees levied by your customer for sub-par work, late delivery or damage during shipment. Be especially wary of such clauses when they allow the customer to assess such charges unilaterally, without mutual agreement between both of you.

I can just picture some of the readers out there, who aspire to increase the ratio of commercial work they do, cringing; asking themselves if this is really the route they want to take. Again, let me stress that the huge majority of wholesale clients are honest. But when you see warning signs like contract loopholes or outrageously lengthy terms, or when a client has a reputation for making collection difficult, remember that you have the option of not working for them.

Just in case you have the idea that doing work for a bad customer, especially if the work is high-profile, is worth the risk, remember this, too: You gain nothing if you are not around to do work in the future. Good customers understand that and are willing to work with you to arrive at terms which both of you can live with. Just as I had an example of what happens when you don't make your terms clear, I have one that illustrates the good that can result when you do, for both you and your clients.

For many years, I have done work for a general contractor who, at the start of our relationship, was consistently miffed when I would insist on a down payment. 'I'm not the bank,' he would say, implying that if my cash flow was such that it required me to get a down payment, then I should be letting the bank finance work, not him.

What he did not seem to realize was that if I went to the bank, my work would actually cost him more. He would not only be paying me what I needed to do the work, but he would be financing my debt load, too.

As custom woodworkers, we would do well to remember that many wholesale clients, general contractors in particular, deal with sums of money on a per-job basis that make our per-job billings pale in comparison. Thus, there is the attitude described above. But in many cases, when we take the time to remind such customers of what their unwillingness to meet us halfway will mean in a larger sense, it pays off handsomely. Remember, we are still the best woodworkers out there, and these people are coming to us exactly because we are.

Over the years, the customer I mentioned has come to understand two things: One, that I'm always going to ask for a deposit and two, that the quality of my work makes allowing for that in his best interest. Meanwhile, I've also met him halfway - I have agreed to lower the percentage of the down payment I require in exchange for payment of the full balance upon delivery when, in many cases, he is beginning to see the payments roll in, too.

There are no two ways about it. Dealing with commercial contracts and collections is vastly different from working with the retail client. But stick to your principles, be willing to negotiate without giving away the store and you can safely navigate the commercial market.

Anthony Noel writes, consults, and teaches woodworking and journalism, along with doing an occasional custom job in his shop in Macungie, PA.

Have a business related question? Visit WOODWEB's Business Forum. The Business Forum is co-sponsored by ISWonline and is moderated by Anthony Noel. All business topics are welcome, from sales and marketing to dealing with difficult customers.

This article is reprinted by permission of Custom Woodworking Business Magazine.