It all starts with an in-depth knowledge of the contract
Whether you work in the private or public sector, as a construction business owner, you face a common problem: getting paid on time. Late payments have almost become an accepted part of the business. Projects take anywhere from months to years to complete, and getting your pay application sent, seen and processed can take seemingly forever.
To ensure you get your money on time – or at least not as late as usual – you need to do your due diligence. This means that a large part of the responsibility of getting your business its deserved pay falls to you. Sending out those pay requisitions in a timely manner is just one step in the entire long, drawn-out process. The following tips will help you budget properly and get you paid on time so you can pay bills and labor, and move on to the next project.
Know your contract
Not every client has the same expectations, and contracts vary – not wildly, but payment can work differently project to project. The owner's contract should make it clear how you will be paid. Some are amenable to progress payments, which gives your business the cash flow it needs before a project is finished. This type of arrangement is based on work in place or a percentage of work that's complete. If this is the case, be sure you meet all the contract qualifications so that you can send a pay requisition.
The most vital tip here is to make sure you submit those pay requisitions correctly. Nothing slows payment more than mistakes you've made in your submissions.
If you work out a deal for monthly billing based on work in place, you'll submit a pay requisition each month. The process typically looks like this:
- Project manager has a pencil review with owner and architect
- Pay requisition goes to the general contractor's departments for approval
- The architect signs off on the final version
- Project manager sends pay requisition to owner's accounts payable
Often, a contract includes a buffer for the payment schedule that takes the owner's red tape into account, especially with larger corporations. Payment can sometimes take 30 to 45 days before you receive it.
Accept credit cards
To make payment exceptionally easy on your client, make sure they can pay you with a credit card. Not all contractors accept them even though it's easier than ever to use mobile credit card technology to accept credit card payments on the spot - even on the job site.
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Understand lien waivers
If a subcontractor doesn't get paid in a timely manner, he or she may get antsy and try to place a lien on the property and work in place. Contractually, the owner is responsible for paying the subcontractor, even though it's the general contractor who has a contract with the subs. To avoid liens, keep the lines of communication open, ensure you're paying subs on time and help the owner pay you on time by submitting mistake-free pay requisitions.
Lien waivers simply protect the owner and general contractor when payment has been made on a portion of work completed with the project. For example, if 50 percent of the work on a $100,000 contract you have with a subcontractor has been completed, and you pay them $50,000, the lien waiver protects you and the owner from a sub placing a lien on the property for the $50,000 they've already been paid.
Send invoices ASAP
This is an obvious tip, but submitting late is a common problem for many general contractors. By submitting your requisitions as soon as possible, it speeds the approval process of every department that wants to see a breakdown of work completed thus far and the subsequent charges. The task of submitting pay requisitions typically falls to the project manager or assistant manager, and it requires that this person be as organized as possible. Setting up automatic reminders can help with this.
Inspire early payments
Although uncommon in many sectors of the construction industry, you could implement a discount if owners pay early. If waiting 30 to 60 days for payment after successfully submitting pay requisition is too long for you and your company's cash flow needs, you could insert a clause into the contract to offer a discount for early payment.
A 1 to 2 percent discount is reasonable, and you have to specify a time limit on that discount, say, two weeks, or 10 business days. It's a risky decision if you have a small business that needs the money, though.
Follow up – often
Once your pay application is sent, give it the minimum amount of time specified in the contract. If you know it takes the owner at least 30 days to process payment, then don't call two weeks after submitting it. Beyond that one month, though, you can absolutely give a courtesy call to your contact with the owner's company.
It's rare to find a construction company that charges interest on late payments, but it's within your rights to do so. However, you need to work that into your contract with the owner. If you do this, though, good luck landing that client's project.
Use a collections agency
If customers don't pay within a reasonable period of time, it's time to call a collections agency. While they will take a hefty portion of the money they collect, you will still recoup some of your costs.