By Tyler Pare
Clients’ expectations are high, margins are thin and competition is fierce. In our current economic environment, contractors work tirelessly to get ahead of the curve, exhausting countless hours to ensure integrity of schedule, budget, safety and quality. However, at the end of the day, a dollar earned is not necessarily a dollar received.
Any principal of a construction firm will tell you that cash is king. There is little room for error when it comes to feeding the cash cycle. Why not apply the same focus and fervor to collecting the monies that are owed to your company as you do to installing the building components for which you bill?
Managing the Process
Unfortunately, too much responsibility for collecting receivables is often shifted to the accounting department. When accounting investigates the reason for a delinquency, it is often determined that the client has withheld payment because it has yet to receive consideration for payment as outlined in the contract.
Problems for non-payment can vary widely - from a problem on the schedule of values, to failing to deliver as-built drawings. Once accounting has determined the root of the problem, the information must be relayed to project management. The project manager then has to spend a day or two digging through the jobsite trailer, chasing down architects and drafting another proper payment application. By the time the project manager is prepared to submit the revised payment application, another billing cycle has passed and the project is out another 30 days on cash collection.
Project managers should control and manage the receivables process, as they can keep better tabs on the nature of outstanding receivables and take the necessary actions to get release of payment from the client. Project managers can use computer “dashboards” that create visual representations to readily identify the dollar value of outstanding receivables and the number of days outstanding. If the issue is identifiable, it is actionable, and the project manager can be proactive about collecting. The project manager can be far more proactive on collections than accounting, and should be in the front-line to keep the project on track.
Best-in-class project managers will set up a meeting with their counterpart in the client’s organization to discuss the billing process and outline expectations before the start of the job. Some will even flowchart the journey of a payment application through the client’s organization. This helps both parties identify the reason(s) behind payment issues, when and if they do occur in the future.
Creating zippered relationships has tremendous value in collecting accounts receivable. Whenever you have to “go over someone’s head” to collect payment, your existing relationships become strained. However, if your organization’s executive leadership has established a rapport with the client’s leadership, payment disputes can generally be resolved amicably, as you have identified who can unstop the blockage. Make sure that the accounting staffs of each party are on the same wavelength as well. Getting feedback from a client on nonpayment is much easier with a familiar voice on the other end of the line. However, relationships will not just materialize on their own. It should be up to the project manager to make the effort to facilitate introductions and bring the two organizations together.
A zippered relationship is one in which many people at a firm have connections with many of their clients’ employees. Both parties strive to broaden their relationship by having multiple people in multiple points of interaction.
From a construction standpoint, projects that start well generally finish well. The same can be said for the billing process on a given job. The first billing cycle is a project manager’s greatest opportunity to establish expectations with a client. Billing properly from the outset will improve your ability to maneuver when turbulent waters appear downstream.
In the beginning of the project, there are typically no extraneous items that would impede payment. If the paperwork checks out and the payment application is delivered on time, you should expect payment in a timely fashion. Take note of how quickly the first payment application is processed and released. Use that period of time as a benchmark for the time it should take subsequent billings.
If receipt of payment deviates significantly from this unofficial “benchmarked” schedule, that should raise a red flag for your project manager. While there are a multitude of issues that can delay payment, the important thing is to identify is the issue (or issues) delaying payment as early as possible. This allows project managers to be proactive in resolving the issue. If the first payment is delayed unreasonably, then take immediate action to secure payment. It is a matter of training the customer as to what you will and will not accept. In the case of a first offense, pressing for payment should always be done with grace.
Proper billing may not be the first thing that comes to mind when you think customer service, but it can have a huge effect on the client relationship if it is mismanaged. Front-end loading a schedule of values and overbilling are, unfortunately, common practices in the construction industry. However, extreme behavior in this arena can cause a client to halt release of payment. “Getting your hand caught in the cookie jar” can severely damage the client. Once trust has been eroded, it can be a long, uphill climb to regain it.
At 5% to 10% percent of contract value, retention often equals or exceeds the net margins being realized in today’s construction markets. That being said, it is extremely important to collect on retention as early as possible. One of the most common issues in collecting retention is failing to deliver a completed project.
The onerous task of compiling a punch list should not rest squarely on the shoulders of the client. As a retail consumer in your everyday life, you would not accept a transaction that included the caveat of a punch list attached to the “finished” project -- so why should you expect your customers to accept this? Start by generating an internal pre-punch list. Collaborate with all members of the project team to devise an exit strategy and coordinate with other trades to execute the strategy. Setting a goal to achieve zero punch list items will help drive your exit strategy across the finish line. Monetizing the punch list can help both parties accelerate their performance and payment on major items.
Avoid being pennywise and pound-foolish in the closeout process. Getting off the project in a timely fashion is paramount. Ignoring potential liquidated damages, the cost of extending project overhead and multiple mobilizations can cripple the margins of an otherwise well-executed project. Ultimately, delivering a truly complete product will do wonders for your reputation and your ability to collect retention.
Prior to commencing a project, or even signing a contract, your company should have a process for determining the creditworthiness of a client. There are many methods and sources for researching a client’s credit history, some more discrete than others:
- Dun & Bradstreet
- Credit bureaus
- National Association of Credit Managers
- Other contractors
- Other customers
- Financial statements
- Company brochures
- Project funding agreement
- Clerk of the court
Having this information upfront should give you a clear indication of the payment risks involved in a project. Monitor your clients’ credit risk throughout the life of their contracts and know their financial standing at all times. You should always have contingency plans, but some at-risk clients may deserve more attention than others.
At the point where you have earned full right of payment and an account is still delinquent, the ownership of the collection process can be transferred to accounting. Know your available remedies and safeguards within the confines of the contract and have specific plans for legal action, if necessary.
Contractors, subcontractors and clients often work together on multiple projects simultaneously. A payment concern on one project can quickly become a systemic risk for a large portion of your backlog. If issues arise on one project, make sure that they are communicated to areas of your organization that may have similar exposure.
Managing receivables is not unlike managing physical construction. Simple actions can be taken at the onset of a job to improve the flow and conversion of receivables:
- Know your clients inside and out.
- Establish a rapport that sets precedent for the remainder of the project.
- Have a plan for managing outstanding and delinquent accounts.
- Be aware of risks and communicate them clearly to all parties involved.
It is hard enough to earn a dollar in today’s construction markets; the process of collecting that dollar should not be the bane of your existence.
Tyler Pare is a consultant with FMI. He focuses on leveraging his construction experience, coupled with his advanced knowledge of business mechanics, to help clients mitigate risks and improve productivity. Tyler may be reached 813.636.1266 or via email at email@example.com