Different parts of the country are experiencing different levels of business activity. Parts of our great country are still enjoying the benefit of a strong construction market while others are not so fortunate. Prompt payment from general contractors and owners is critical to all subcontractors no matter what your volume or workload. Many subcontractors send a bill and then wait until they get paid. Maybe the limit is 30, 60, 90 or 120 days before meekly asking the status of payment? For those whose limit is 90 days before becoming concerned, let’s do a little math.
$10,000.00 past due for 90 days
1. Three separate billing preparations: $ 75
2. Three phone calls to customer: $ 75
3. Material/labor lien $ 75
4. Interest you’re entitled to at
8% for 90 days. $200
5. Bank interest if you’re borrowing
at 8% for 90 days. $200
6. Loss of working capitol for 90 days. ?
7. Collection fees as high as 50%. ?
8. Customer relations. ?
9. Frustration. ?
Hard Dollar Estimated Impact: $ 675 (You lose)
If sent to collections: $ 5,000 (You lose)
Worst-case Scenario: $10,000 (You lose)
Today, I sent a $2,300 contract to our collection agency. It will charge me 30 percent to collect on this invoice. Hopefully, we will collect the interest and collection fees as noted in our contracts.
Collection agenciesA good collection agency is worth the money. It can wreak havoc with a person’s credit. Don’t underestimate the power of using a collection agency. If you don’t have a relationship with one now may be a good time to find and negotiate an agreement. I would suggest using a local company that has a good reputation.
When it comes to collecting money, talk is cheap. Words can weaken your position if you don’t choose them carefully. A well-crafted written statement attached to your contract or proposal describing your credit policies works best. Let customers know what your credit polices are prior to entering into an agreement or prior to starting work.
If credit polices are clearly defined in the contract or proposal, you will most likely be way ahead of the other subcontractors on the job. In most cases, you will be far ahead of your competitors.
A commercial ironworker I know includes his credit policy on his fax quote form, which is then attached to his subcontract if he is the successful bidder. His policy is 12 percent interest on all past due amounts as well as a requirement for the customer to pay collection and attorney fees.
Creating a credit policy is not that difficult. Talk to an attorney or at least talk to a collection agency as to what should be included in your credit policy. After all, you are a bank in the truest sense of the word. You are more likely to get paid if you have a policy rather than not.
Rope a dopeThe owner or GC sometimes plays one of two games. Wear you down or keep you off balance. Both tactics work well. Muhammed Ali would sometimes lie back against the ropes and let his opponent pound the daylights out of him. While up against the ropes, Ali would rest his legs and arms while his opponent exhausted himself pounding away. It looked like Ali was in trouble against undefeated champ George Foreman (maybe he was) but the old “rope a dope” seemed to work in the end.
Can you see yourself pounding away on someone trying to collect your money while they lie back in their chair listening? After you finish talking, he tells you that he understands and hopes to get you paid soon. He may even give you some payment dates that he hopes to meet or may promise to pay you by a future date. No matter what he says, if you don’t have a credit policy you don’t really have anything other than the law to help you. Enforcing the law can be excessively expensive if you have to hire an attorney. If the big bucks are made in courtroom cases, why does our attorney spend his time teaching (us) his clients how to stay out of court? He knows how expensive it is!
The most powerful and effective tools a subcontractor can use to collect money are a well-defined credit policy, a relationship with a construction attorney and collection agency, as well as material and labor liens. Try to picture the entire process of collecting your money. Think it starts with a phone call? It doesn’t! It starts with a credit policy explaining exactly what will happen if you are not paid. We all expect to get paid however you may not. A good credit policy sets you apart from other contractors!
Stop workI’ve been considering implementing a serious yet straightforward “stop work” policy with regards to non-payment. Can anyone give me a good reason for continuing working if not paid? A “stop work” option for non-payment is fair and reasonable, however I see problems that could become serious if I chose to stop work. I do believe a properly crafted credit policy could include language that assures the right to stop work for non-payment without creating added liability for delays.
Many GCs have payment bonds ensuring the owner that all bills will be paid. If a customer has a payment bond, it would be wise to talk to your attorney about how to file a claim against the bond. I’m not suggesting that you stop work because I’m not sure if it is the best policy, however I believe an option to stop work as part of a credit policy would not hurt. When you get to the point where you are considering stopping work due to non-payment, I would suggest that you get expert legal advice before doing so.
Above is a sample credit policy. It is an example only. Do not use it as a credit policy. Consult an attorney or collection agency for a legal and binding credit policy format and design.
A credit policy can be printed on the back of your proposal or it can be included as part of the quote. To help decide to implement a company credit policy, consider the following facts:
• If you rent a home or apartment you are bound to a credit policy.
• If you have a credit card you are bound to a credit policy.
• If you are making car or truck payments you are bound to a credit policy.
• If you are making payments for dental or orthodontics you are bound to a credit policy.
• If you have car, home or life insurance you are bound to a credit policy.
• If you buy material you are most likely bound to a credit policy.
How do you like paying those late fees on your credit card or house payment? One of the reasons the rich get richer is because they have credit polices and you don’t. Think about it.
Remember: Teamwork begins with a fair contract!