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How You Can Avoid the Risk of Nonpayment

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Getting paid can be hard for any business, but getting paid in the construction industry is especially difficult.  Construction industry businesses do an excellent job of prioritizing AR management - they’ve learned that a strong receivables management program is crucial to not only getting paid, but getting paid on time.  All types of businesses can learn from the best practices of the construction industry to tackle nonpayment and AR management by risk-shifting mechanisms in contracts, and knowing the ins and outs of the security rights available to them.

The Foundation of Risk-Shifting Contracts
Many factors contribute to the difficulty of getting paid on time in the construction industry.  Aspects such as scope of work issues, inspection problems, change order disputes, pay when paid or pay if paid clauses in contracts, and some of the highest failure rates of any market all play a part.

Long-standing public and legal policy is that trade contractors and suppliers should be paid for their work, even if they did not fully complete the project.  The possibility of project abandonment, or other factors that could derail a project, puts many different industries at risk for nonpayment.  No business should be held to an “all or nothing” payment mentality.  Many businesses can learn from the construction industry’s tactic to ensure they get paid, even for partial projects, by utilizing “the mechanics’ lien instrument”.  This concept ensures that subs and suppliers are protected from bearing the burden of nonpayment on construction projects.

Mechanics’ liens work to protect parties on a construction project in many ways: by obligating more parties to pay, by demanding the attention of the owner and lender, by causing a breach of contract, by prioritizing certain invoices and, potentially the most important, by encumbering the property itself.  An unpaid mechanics’ lien claimant is able to initiate a lawsuit to foreclose on the property itself, and have the property sold to satisfy the debt.  Because of this protection, and the public policy idea that subs and suppliers should not be forced to bear the risk of nonpayment, that risk was pushed up the payment chain to the property owners and general contractors. 

Property owners and GCs don’t want to shoulder financial risk any more than subs and suppliers do, so they fought back with contract provisions specifically designed to force risk back down the payment chain.

Utilizing automated technology like Zlien to manage security and lien rights also drastically improves the success rates of construction industry businesses.

What Your Business Should Do:
• Ensure that your contracts fully cover you in the event of project non-completion.  Include a paragraph that dictates, “In the event of project non-completion, payment will be expected in line with work completed”.  Be sure to verbally let your client know that you will expect payment for the work that you are able to complete, even if the project is never completed, for any reason.

• Have as many parties as you can sign the sales contract, including the person in charge of accounts payable.
• Separate the project into different invoices, with each due at varying intervals.  This means that your time and work during the first week should be invoiced upon completion as Section 1 of your work on the project.  This will help you avoid one large unpaid bill at the very end of the project.
AR Management in the Construction Industry

Construction industry businesses are more likely to utilize digital invoicing software and AR management platforms, both of which significantly increase their efficiency and ability to handle a large volume of invoices and clients.

With digitized records, human error is less likely.  It also gives the AR manager the leverage of being able to cite specific dates, details, and contracts in their collections communication.  AR management platforms (such as the FG Receivables Manager) allow for maximum insight into the progress of each invoice’s payment -- or lack thereof.  Most AR management platforms also come pre-loaded with collection emails, so communicating with clients can be done quickly and without sacrificing quality.  Typically, construction industry businesses are diligent in immediately following up with a past due invoice, which increases the likelihood of successful payment.

What Your Business Should Do:
• send smart invoices  (http://resources.fundinggates.com/invoice-tricks/)
• track invoices with your accounting software and an AR management app
• be diligent with your AR management and collections communication
Find additional tips on successful collections strategies here:
(http://blog.fundinggates.com/2015/03/collection-strategies-for-the-most-common-types-of-customers/)

Resources for Tackling Nonpayment:
• Collection Letter Templates (https://www.fundinggates.com/tools/receivables-starter-kit/)
• Action Plan for Common Late Payment Excuses (https://www.fundinggates.com/tools/receivables-starter-kit/)
• The Small Business Owner’s Guide to Receivables Management  (http://blog.fundinggates.com/category/receivables-management/)
This article courtesy of the Funding Gates blog at http://blog.fundinggates.com

Tags: More, Construction Management



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