June 26, 2018

Construction companies often have a tough job when it comes to structuring their pay schedules so that they ensure that they are getting paid on time without overburdening their client with bills all at the same time. Nonpaying clients make this an even trickier balance as construction companies strive to get paid despite the fact that clients seem to keep evading the topic of paying the invoices which they owe on.

The question is: What is a construction company to do when a client simply refuses to pay for the work that has been done?

In this case, there is both fortunate and unfortunate news for the construction company. The good news is that there are laws and certain rules that protect the construction company and their right to be paid for the work that they have done. The bad news is that sometimes the rules and regulations in place for what a construction company can get paid are a bit confusing and in most areas will cover the larger projects that construction companies do. This might leave smaller construction companies feeling as they have relatively little power to get customers to pay for the work that has been done.

However, in the end the following are some of the things that construction companies can do up front to make their clients understand what the agreement is and how they are going to be paying for the work that is done:

Write A Clear & Thorough Contract:

Write up a contract that makes it clear and non-debatable as to what work the client is agreeing for your company to do and what the cost will be to that client for the completed work. Set up a payment schedule that spreads the cost out throughout the entire project. Be flexible to work with the client's budget, money flow, and time line to help complete the project on time. While working with the client is a great tool in your pocket, be sure that you are getting paid for the work as it is done so you are able to pay your employees and cover your company's expenses as well.

Sign The Contract:

Not only should your construction company and the client both sign the contract, but the person who is directly responsible for paying the bills for the client will sign it, too. This way everyone is on the same page as to understanding when payment is expected for each piece of the completed project.

Stagger The Payments:

Allowing clients to pay in smaller increments of money periodically throughout the project will help make that project that much more affordable for the client. This is especially true for smaller clients who may not have endless budgets for larger building projects. Set up a clear payment schedule that reminds the client when each payment is due.

Use Smart Invoices:

Smart invoices can send electronic reminders and invoices to clients to help remind them to pay their bills on time. When the bills pop up on the clients screen, they are more likely to remember to pay them than if the bills are sitting in a pile on their desk collecting dust for weeks before they are due. Putting your payments in the front of the client's mind may be the difference between prompt, on-time payments or being paid whenever the client cleans off their desk to see the bill or is sent multiple reminders.

Track The Invoices You Send:

Using a variety of different types of accounting software and AR management apps to help track the invoices that you have sent to the customer and the response (or lack thereof) that has been received in return. Tracking the invoices you sent proves to the client that you have requested payment as a specific time and date. Keeping these invoices can be crucial if future issues and disagreements arise in payment and how much the client owes or already has paid for the project being completed.

How DO I Tackle Nonpayment Issues With Customers:

Despite all of your good intents and communications as you try to work with the customer on a payment schedule, sometimes the client simply will just end up not paying for the work that you have done in a timely manner. Moreover, some clients may just refuse to pay at all. Whatever reason they have for not paying, there are ways that companies can protect their work and rights being paid in the meantime.

The following are some of the various tools and methods you can use to help protect your business from being exploited by those who are not paying up:

Obtain A Mechanical Lien:

A mechanical lien is a tool that works to protect the construction company by requiring the customer to pay what is owed through demanding the attention of the owner and lender. Mechanical liens will prioritize your invoices and ultimately put a lien on the property of the customer if they decide not to pay for the work that has been done.

If nonpayment still persists, in some cases the construction company seeking their money will have a right to press a lawsuits. Ultimately, failure to pay on the part of the client can result in foreclosure against their property as the construction company seizes ownership of that property to pay for the unpaid bills that the customer had withstanding.

This is ideally the best way to protect your company from clients who refuse to pay.

Cease Work On The Project:

In some cases, if the client continues to refuse to pay the invoices for the work your company has already done, companies can cease work on the project until the client pays what is owed. The laws on if a construction company can halt work on the project of a nonpaying client will vary by state. Some states will allow construction companies to halt their work on a project in the event of nonpayment for a certain period of time while others may allow it indefinitely. It's important to know the laws in your state so you are obeying the law if you consider stopping work on the project of a nonpaying client.

In worst-case scenarios that can mean taking some of the cases to court if nonpayment persists. However, most cases will never go past the local courts, which are much easier to handle than the federal court systems. However, very few nonpayment cases will get to the point of going to the federal court system in the first place.

For more information on how to ensure that your construction company is getting paid on time for the work they do please feel free to contact us.

Sources: 

https://www.proremodeler.com/how-handle-clients-refusal-pay
https://blog.zlien.com/construction-payment/collection-tips-for-construction-industr/