There is an old and long-respected maxim in business: No deal is complete until you are paid.
And here is another one: The one thing worse than not landing the job is to win it, complete it, and then not be paid for it. The math is straightforward.
The Economy
It stands to reason that in this economy 30 days tend to become 45, then 60, at which point the time to worry has definitely arrived.
But how prevalent is this trend?
Kim Sides, president of Sides Drywall in Alabama, does not hesitate: “There is no doubt about it.”
Brent Tumey, director of operations at MSI in Arkansas, agrees, but with a qualification: “It depends on the size of the contractor. We are seeing a lapse with the smaller contractors, the smaller generals. But the larger GCs still keep current.
“The bigger boys can still fund the projects. The smaller ones, I’d say 50 percent in our area, are struggle a little right now, robbing Peter to pay Paul.”
Greg Vangellow, president of R.W. Dake in New York, says, “Yes, I think there is some slowdown, but due to our customer base, it has not been so dramatic for us. I do a fair amount of renovation work, and they are direct clients as opposed to working through GCs. Some GCs have slowed down, I’ve noticed, but my direct customers have not changed much.”
Michael Hoffrath of Canyon Plastering & Drywall in Arizona had this to say: “I have not really noticed a slowdown in payments—it’s always been slow—but I have noticed a marked slowdown in having change orders added to our contracts. The owner and GCs want to do the changes but they drag their feet about adding those amounts.”
Gerald Roach of Forks Lathe and Plaster in North Dakota has seen “excuses and slowdowns.”
Dave DeHorn of Brady Company in Los Angeles is more fortunate: “We mainly work with large clients, and their payments are still coming in on schedule. But I would think the smaller guys, working for smaller owners/GCs, see some slowdowns.”
Jeff McFarren of Green Mountain Drywall in Vermont also has good news to share: “We saw a slowdown at one point, but now it’s not that bad.”
Robert Aird, president of Robert A. Aird, Inc. in Maryland, and Eric Boulanger of Boulanger Drywall in Florida, however, confirm the general trend: “It is taking a bit longer to get paid, due to the economy; we now have to place a few extra phone calls to get the money.”
On the whole, 30-day net seems to be out of fashion these days, which will put a strain on the cash flow of any company. And this begs the question: How do you handle this?
Let’s step back, and review some basics.
Receivables 101
If you find that your receivables are growing a little too fast for comfort, review your fundamentals before you track your attorney down. A measured and standard approach to receivable collection will always win out in the long run over liens and the courts—especially if you want to protect, or foster, long-term relationships.
Pristine Books
Someone once said that if the ship won’t leave the dock, no matter how much you gun the engines, you had better check the mooring lines have been cast off. Such basics are sometimes overlooked.
In the same way, you cannot take preventive or collection measures on your receivables if you don’t know what they are. This means good accounting software (and/or a skilled accountant) in place, up-to-date at all times, capable of clear accurate reports. Consult and believe these reports, and act accordingly.
Business Credit Policy
Ensure that your business has a known credit policy. Normal business practice in our field is net 30 days after billing. The key here is to make this very well known.
Therefore, always make your credit and payment terms part of the proposal, and if you win the bid, part of the contract. This is an area that should never be open to question or interpretation.
Carrots on sticks. Frequently, commercial business will offer a 1 percent or 2 percent discount on all bills paid within 10 days. It’s a thought, but considering the often-tight profit margins in the construction field, this is not a common practice.
How about penalties for accounts 60 days and older? This is also a common practice in general business, but again—mostly due to relationships that form in construction, where communication is always more effective than the threat of penalty—this is not recommended, nor often used in our field.
Credit Checks
It should be second nature to find out all you can about a company you have not worked with, or for, in the past. Your sources are many:
• Dun & Bradstreet reports.
• Bonding company reports.
• Contractor registers.
• Insurance records.
• Asked for—and supplied—credit references.
• Other local subcontractors.
• The American Subcontractors Association for out-of-area companies.
• Better Business Bureau.
Says Sides, “We typically request a Dun & Bradstreet report, and we also contact ASA in different parts of the country and ask what experience they have had with a GC.”
Vangellow agrees: “If I have not dealt with a contractor or customer before, I will do a credit check either by talking to their bank or by asking them for credit references. Now, that can get a little touchy sometimes, depending on whom you’re asking. I have run into some GCs who go, ‘How dare you ask me about my credit?’ So, I say, all right, I guess we won’t do your job.’
“I used to be a banker. And as a banker-turned-contractor I know what a banker will tell me and what he will not. So, I know how to dig little.
“I ask other contractors as well. If I haven’t dealt with the GC or customer, I use my own network to see who knows this guy. I’ll talk to the bonding people, I’ll talk to the insurance people, talk to other contractors and get a general feel for who he is. That way you’re not in for any surprises.”
Hoffrath says, “If it’s a contractor we have not worked with before, we definitely check him out. We ask them for references. We check with the register of contractors to establish the owner, and whether there are past complaints. We will also research their past projects, asking subs who worked with them how they were treated, not only in the field—how the supervision was—but also how quickly they released change orders and added change-order money to contracts … and, of course, how fast they paid.”
Remember, the GC or customer who takes offense to having his credit checked is the one who needs it checked. Don’t doubt it for a moment.
Also, it goes without saying that if you smell trouble, don’t go there. Remember, the job you complete but don’t get paid for is far worse than not getting the job in the first place. Headaches, ulcers—no fun.
Collection Methods
Your accounting software, or your accountant, will provide you data on aging accounts by customer: total balance owed, amount current, 30 days past due, 60 days past due and past 90 days.
Decide for your business when (a) to become nervous, and (b) to start calling. You know your customers and their payment histories; in other words, you know when to start worrying. It might be at 45 days, perhaps at 60.
The key principle to stand up and pay attention to is that the longer an account goes unpaid, the more difficult it is to collect.
Mailed statements stamped with “Past Due” in big red letters will call attention to the situation, but in a relation-based business such as ours, the phone call is usually far more effective. By all means, send the past due statement, but don’t expect it to lie in some in-box and do your talking for you—pieces of paper are far easier to ignore than a human voice.
Aird says his at company, “at 45 days, we start making the calls.”
Sides agrees, “Thirty days is the norm, so when it gets close to 60 I start calling. Actually, I bug them. I stay in their face. Not that I am mean or antagonistic about it, I just want to get paid, and I make that very well known.”
Roach concurs: “Usually the best measure is keep calling.”
Note, though, that if you do work for the federal government, 60 to 90 days is considered the norm, so there is little need to begin calling before then.
Liens. Possibly the most effective means a contractor has to exact payment on accounts overdue is to file a lien against the project. Bottom line: The owner cannot obtain clear title to the property with liens pending.
As Hoffrath puts it, “Once you file your lien, everybody wakes up. The owner finds out about it soon enough, and he does not want to have any of those problems because that ties up his project and will hold up his final payment.
“So, if you are not getting anywhere with the general contractor you may have to perfect the pre-lien notice. I don’t like to, because it takes time, it costs us money, and you ultimately make the general contractor look bad, but you have to protect your own interests first.
“Once we’ve filed a lien, we usually hear from them within 24 hours.”
Laws, rules and regulations pertaining to liens vary from state to state; keep on top of them.
In California and Arizona, for example, if the contractor wants to retain the right to file a lien, he must file a 20-day pre-lien notice at the beginning of the project. This entitles him to perfect the lien—request an actual lien against the project—within 20 days of the last day on the job. Should he fail to perfect the pre-lien within this time period, he forfeits his rights to file a lien.
Other states require a pre-lien to be filed within 10 days of completion of the job, and the actual lien to be file within a month or two after that.
DeHorn, operating in California, says, “We file a pre-lien for every job we do. Absolutely. Because if you don’t, you’ve lost that right. That’s the first thing we do when we receive the signed contract, we pre-lien the job.”
Hoffrath in Arizona concurs, “Before you start the job, you send all the information to the lien service. You file your 20-day pre-lien.”
A lien will get people’s attention, and will most likely get you paid—if there is money left in the project to pay anybody. But this short-term benefit needs to be weighed against possible long-term damage to the contractor-GC relationship. Survival would be the touchstone: If you don’t file a lien and are paid, will you be around for the contractor’s next project, no matter how much he likes you?
Warranty. The warranty is another avenue to take on the way to getting paid.
Sayst Aird: “And then there is the bargaining chip of the warranty. You should never, ever, give it until you have your final money. Never. And of course, the GC needs your warranty in order to get his final money.”
Collection agencies. There does not seem to be a good fit for the collection agency in our industry. Most contractors much prefer to go the lien route, and failing that, they will take the GC to court.
One interesting note on the collection agency, however—which costs you very little—is to ask them to send a “pre-collect” notice, which simply is a notice from the collection agency to the delinquent GC to the effect of “We’re monitoring this account; make arrangements to clear it in full, or we will take over the account.”
Since actual collection agency fees run 50 percent of the total amount—you in essence turn the account over to the agency—it would be a very, very last resort. The pre-collect notice, however, can be just as effective and virtually free by comparison.
The courts. If the lien fails to produce results, it’s time to go to court. Never a pleasant prospect at the best of times, but it can—especially if large amounts are involved—again, be a point of survival.
However, as Aird points out, “rarely does a court case in construction go all the way to a jury or administrative decision. It always gets settled before then, normally as a result of lawyer negotiations.”
McFarren says, “If the lien doesn’t work, we take them to court, using the lien as leverage. Once we file the court papers, we usually get paid.”
Fire the GC
As the saying goes, “Once burned, shame on you; twice burned, shame on me.” It probably goes without saying that if you have had recurring payment trouble with a GC, fire him; no longer do business with him. It is not worth the headaches and the time and money lost in chasing slow payments.
A/R Goal
A healthy business normally runs an accounts receivable total at around 10 to 12 percent of annual sales. Use that as a benchmark, and take action if it grows much large than that.
The Economy (Revisited)
Given how receivables are normally handled, has the current economy changed this approach?
Vangellow thinks it has. “In this economy,” he says, “you have to be patient. Collection can be an expensive and unnecessary step that can damage long-term relations.
“You can circumvent most issues by staying on top of them and by communicating. Yes, there’s a point where you have to be firm, but a little understanding goes a long way.”
Sides has also noticed the change: “With some, I work out payments. One of the things I can’t stand is being pushed aside and lied to, so tell me what you can and cannot do, and let’s work it out.”
Advice from the Trenches
When we asked our interviewees for some final words, here is what they had to offer:
Vangellow: “Do business with people you trust, and be diligent in monitoring your receivables.”
Hoffrath: “Check out who you are going to do business with. Make sure they’re reputable. Obtain their references; they will on you. Work out your best possible contract, including clarifications and exclusions, and any added line items regarding payment.”
McFarren: “You have to stay on top of it, be aware of what the laws and regulations are for securing payment. If you don’t know how the system works, you could head for trouble.”
Aird: “Learn how to keep good records, and stay on top of those receivables. Seventy percent of subcontractors go out of business not for lack of skill or talent, or because they’re not smart. They go out of business because they lack business and accounting skills.”
Last Words
Know your contractors financially, and ask for references if you don’t—and don’t be afraid to offend. Closely monitor your receivables, and don’t hesitate to ask for the money the moment it’s too slow in arriving for your liking.
Remember: The project is not complete until you’re paid.
Coeur d’Alene, Idaho–based Ulf Wolf writes for the construction industry as Words & Images.
