There are steps you can take in the event you do not get your payment.
After all, that money not only pays for the supplies, labor and subcontractors needed for that job, but also enables you to move on to the next. Nonetheless, several studies have found that over 90 percent of contractors have problems obtaining the retainage (the money the contractee withholds until the end of the project) after a job is done.
Retainage is a standard practice in construction, but there are things you can do to ensure that you are paid during the work and once it’s complete.
An ounce of prevention
First, take steps before the project starts to make sure you are paid regularly and with relative ease for you and your client.
Begin with the contract. Lay out all financial obligations, such as the schedule of payments or the milestones that trigger the next payment. List expected amount (or percentage) as well as the trigger. Make clear provisions for add-ons: who can approve them and what that indicates for payment increase or schedule. Finally, spell out penalties for late payments, finance charges, a provision to collect attorney fees if you need to take legal action, or the right to suspend work until payment is given.
If you are using subcontractors, a pay-when-paid clause can protect you. This clause says you pay your subcontractors when the client pays you. Be sure your client understands this provision, as it can motivate them as well.
When you set payments, particularly the down payment, consider client risk as well as materials and labor. If your new client is an unknown to you, or the project itself is speculative (such as a new, untried restaurant), you may want to demand more upfront, with a small retainage. You can be more flexible when contracting with a trusted repeat client.
Make it easy to pay. Be sure your invoices are clear, complete and correct. One study quoted by Nolo.com noted that nearly 30 percent of late invoices had to do with problems in the invoice itself, while an article on CFO.com said nearly 50 percent of invoice disputes were due to inaccuracies in the paperwork.
Clients should have not only a clear way to pay – such as a self-addressed envelope for a check or the information they need for making an online payment – but also a reminder of exactly what work that installment pays for.
Finally, consider billing software to automate invoices. This makes it easy to send emails to clients, set up online payments, and track reminders, missed payments and more.
When a client doesn't pay
The most important thing to remember is do not wait. There are several steps you can take to get your retainage, the most drastic of which is a lawsuit or filing a mechanic's lien, which we discuss below.
However, many states have a limit on how long you can wait after a project's completion before filing a lien. If you hesitate, you may lose your window. Further, a study of the Atradius Payment Practices Barometer found that over half of payments that went more than 90 days overdue ended up written off as uncollectible. The longer you wait, the less likely you’ll get paid.
Start with a reminder. A past-due notice, with a copy of the bill and a reminder of the contract, including penalties, is a logical first step.
Follow up in person. A simple call or visit can uncover issues that might impact your payment. For example, a customer might be withholding payment because of work undone or badly done. In that case, fixing the problem can get the project and payments back on track. Sometimes, a subcontractor complains to the owner that they are not getting paid, and the owner holds back payment until they know the subcontractor is paid. In this case, the pay-when-paid clause is in your favor; otherwise, you should pay your people.
Occasionally, the client refuses to pay either out of dishonesty or because they are hoping to negotiate a lower project price. When this happens, you must decide what's in your best interest – taking legal action, or negotiating a discount and taking the financial hit.
Send a demand letter. More than a simple past-due notice, the demand letter clearly spells out the payment needed, the deadline for making the payment and the consequences for not paying by deadline. Be exact, particularly in your next steps: "If we do not receive payment by
(date), we will file a lien on the property for (amount) on (date)."
However, do not threaten, disparage or vent at the client, even if you are frustrated. Expressions of anger often make the reader ignore the message. It's best to display an attitude of calm control. After all, this is a business agreement; you are within your rights to enforce the terms of
Studies have found nearly half of clients pay their bills rather than face the inconvenience of legal action. Another thing you can do is suggest arbitration to resolve the issue, which can be cheaper than a lawsuit.
Editor's Note: Looking for a collection solution for your business? If you're looking for information to help you choose the one that's right for you, use the questionnaire below to have our sister site, BuyerZone, provide you with information from a variety of vendors for free:
The mechanic's lien
If a client still fails to pay, you can file a mechanic's lien, sometimes called a construction lien, laborer's lien or artisan's lien. A lien states that you have a claim on the property because of unpaid work you put into it. While a lien is on the property, it's difficult for a client to sell or refinance it, and it has an immediate negative impact on their credit score.
A lien is a legal document, and each state and county has its own rules, including limits on how long after a project's completion before you can no longer file a lien, the information needed, even the kinds of forms. Do your research to make sure you meet requirements. Also be very careful about the forms; there are stories of liens being rejected for something as simple as font issues and margins. Finally, include the invoice for the unfinished work.
You can file a lien in many ways, but many experts recommend doing so personally, because a clerk can check it on the spot for errors, saving you the time of correcting issues and potentially missing the deadline.
Often, when the lien is successfully filed, the client will pay the bill, called satisfying the lien. If they do not, you can enforce the lien by lawsuit or wait for the property to go on sale, in which case you will be paid according to your stand in the priority list of others who have claim on the property because of the owner's debt.
You do not have to have a lien to file a lawsuit, of course. There are several options for this legal course of action. No matter what you choose, however, be sure to have all your legal documents ready:
- Copies of all correspondence, including any replies
- Before and after photos of the work when possible
- Subcontractor invoices
- Records of your payments for supplies, labor, etc.
Notify the client of your intent. As with a lien, clients will often pay their bill rather than face court action.
Hire an arbiter. If you are on fairly good terms with a client, or they are withholding payment for what they consider a valid reason (such as dissatisfaction with part of the job), then arbitration might be a less stressful way to resolve the issues and get paid. Arbitration can cost as much as small claims court, and usually the parties split the cost. An arbiter's decision is legally binding.
Go to small claims court. This court is commonly used for debt collection, but it is restricted by dollar amount. This varies by state, but it's usually less than $10,000. You do not need a lawyer, but have your documents to prove your case as if you were going to superior court.
Go to superior court. If your client owes you more than allowed in small claims court, you can either sue for the maximum permitted in small claims and take a loss on the rest, or you can file in general superior court. While this is still as straightforward as filing in small claims, you may want to hire a lawyer for this option.
Debt collection agencies
Some contractors prefer to avoid the hassle of debt collection by hiring an agency to handle it. Debt collection agencies have expertise and experience in collecting payments, and because they are not directly involved in the project and customer relations, they can put pressure on your client. This could be a cheaper option than legal action as well.
If you choose this route, select your debt collection company carefully. In addition to pricing, check its reputation through customer reviews and referrals. Find a company that specializes in the construction industry if you can.
Finances are as important to the job as the project itself. By taking some care in the contract and billing process, you can avoid late payments. However, if you do have trouble getting paid, especially that retainage, there are options for getting the recompense you earned.
Image from Have a nice day Photo/Shutterstock