How to Get Paid as a Contractor

How to make contractor payment easier for your clients

Take the following steps before the project begins to make regular contractor payments easy for your clients:

1. Set up and develop contracts. 

Setting up client contracts is crucial to helping everyone stay on the same page. Consider the following tips: 

• List all financial obligations. Spell out all financial obligations, such as the payment schedule or the milestones that trigger the next payment. List the expected amounts (or percentages) as well as the trigger. 
• List add-on provisions. Make clear provisions for add-ons, including who can approve them and what they indicate for payment increases or the project’s schedule. 
• Lay out payment penalties. Spell out penalties for late payments, finance charges, a provision to collect attorney fees if you must take legal action, and the right to suspend work until payment is given.
• Include a pay-when-paid clause for subcontractors. If you use subcontractors, a pay-when-paid clause can protect you. This clause says you’ll pay your subcontractors when the client pays you. Be sure your client understands this provision, as it can motivate them, as well. 
• Consider client risk when setting payments. When you set payments, particularly the down payment, consider client risk as well as materials and labor. If your new client is unknown to you, or the project itself is speculative (such as a new, untried restaurant), you may want to demand more upfront payment with a small retainage. You can be more flexible when contracting with a trusted repeat client.

2. Make it easy to pay. 

Make sure that your construction business invoices are clear, complete and correct. Far too often, late payments stem from invoice problems or paperwork inaccuracies. Follow these invoicing best practices to make it easy for construction customers to pay: 

• Offer multiple payment options. For renovations and other smaller jobs, consider accepting credit cards to make it more convenient for customers to pay, and give them some time to pay it off. Checks, wire transfers, online payments and ACH payments are also convenient payment forms. 
• Provide a clear way to pay. Your invoices should contain all the information your clients need to pay you. For example, include a self-addressed envelope for a check or the specific information clients need to pay online. Your client should already have your direct deposit information for ACH payments unless this is their first invoice from you;  the first invoice should include this information. If you prefer a wire transfer, include your banking information.
• Spell out what the invoice covers. In the invoice, provide a reminder of exactly what work the installment pays for.

3. Use invoicing tools.

Invoice automation software lets you send complete, easy-to-understand invoices in just a few clicks. You can also easily email clients, track reminders and missed payments, set up online payments, and more. That said, no matter your invoicing platform, you should always double-check your auto-generated invoices to minimize billing errors.

Learn about top accounting and invoicing software, and select a platform that integrates with your other business programs. You also may want to choose a platform with expense tracking and mobile invoicing. 

4. Establish a payment schedule and terms.

To ensure timely client payments, include a contractor payment schedule in your invoices. For example, listing “net 30” as your payment terms lets your client know you expect payment within 30 days of invoice receipt.

5. Don’t wait to send invoices.

An invoice sent in April for a project completed in February won’t feel urgent for your client. 

That’s why you should set up invoice workflows that ensure timely invoice creation and delivery.

Monthly client billing is common for contractors. However, other billing approaches exist. You can bill your clients after you complete each project, or you can send invoices every time you reach a specific number of work hours.

What to do when a client doesn’t pay

When a client doesn’t pay, don’t wait. You can take several steps to get money from a nonpaying client, but if you hesitate, you may lose your window. The longer you wait, the less likely you are to be paid. 

Here are several debt-collection steps to take:

1. Contact the client about nonpayment.

Take the following steps when you’re contacting a client about nonpayment: 

• Send a payment reminder. Start the process with a reminder. Sending a past-due notice with a copy of the bill and a reminder of the contract, including the penalties, is a logical first step.
• Follow up with the client. A call or visit can uncover issues affecting your payment. For example, a customer might withhold payment because the work is undone or poorly done. In that case, talk to the client to determine how to get the project and payments back on track. Sometimes, a subcontractor complains to the owner that they’re 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 regardless of your payment. Occasionally, a client refuses to pay either out of dishonesty or because they want 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 states the payment needed, the payment deadline and the consequences of not paying by the deadline. Be specific, particularly on your next steps. For example, “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 that agreement. Another thing you can do is suggest arbitration to resolve the issue, which can be cheaper than a lawsuit.

2. File a mechanic’s lien on the property.

If the client ignores you and fails to pay, you can file a mechanic’s lien, a business legal term 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 the 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 the following:

• Limits on how long after a project’s completion you can file a lien
• The information needed to file a lien 
• The kinds of forms necessary

Ensure that you meet all of the applicable requirements. Also, be very careful about the forms — there are stories of liens being rejected for things as simple as font issues and margins.

When you’re filing a lien, include the invoice for the unfinished work. You can file a lien in many ways, but if you do it in person with a clerk, they can check it on the spot for errors, saving you the time of correcting issues and potentially missing the deadline.

When the lien is successfully filed, the client can pay the bill, 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 where you stand in the priority list of those who have a claim on the property because of the owner’s debt.

3. Pursue litigation on your unpaid invoice.

You don’t need a lien to file a lawsuit, of course. You have several options for this legal course of action. However, no matter what you choose, have all of your legal documents ready, including the following:

• Contract
• Invoice
• 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.

Take the following steps when you’re pursuing litigation: 

• Notify the client of your intent. As with a lien, clients will often pay their bills rather than face court action once you alert them to your intentions.
• Hire an arbiter. If you are on reasonably 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), arbitration might be a less stressful way to resolve the issues and get your payment. 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 a common method for debt collection but is restricted by the claim’s dollar amount. This varies by state, but it’s usually for claims worth less than $10,000. You do not need a lawyer for small claims court, but you should have your documents ready to prove your case as if you were going to a superior court.
• Go to superior court. If your client owes you more than allowed in small claims court, you can sue for the maximum permitted in small claims court and take a loss on the rest, or you can file in general superior court. While this is as straightforward as filing in small claims court, you may want to hire a business lawyer for this option.

4. Use a debt collection agency to collect your payment.

Some contractors prefer to avoid the hassle of debt collection by hiring an agency to handle it. The best collection agency services have expertise and experience in collecting payments. Because they’re not directly involved in the project and customer relations, they can put some pressure on your client as long as they comply with the laws for debtor treatment. Debt collectors could be a less expensive option than legal action.

If you choose this route, select your debt collection company carefully. In addition to pricing, check its reputation through customer reviews and referrals. If you can, find a company that specializes in the construction industry.

Ensure fair compensation as a contractor

Finances are as essential to a construction job as the project itself. You can avoid late payments by carefully handling the contract and billing process. However, if you have trouble getting your payment, especially the retainage, you have options for getting compensated.

Jennifer Dublino contributed to this article.