Design-build firms are no stranger to dealing with late payments and delinquent accounts.
Since design-build companies own the whole construction process from designing the project to its completion, the contractors assume greater financial risk compared to the client. By working on large jobs in all phases of the construction process, design-build firms may struggle in the event of a client’s nonpayment. The very existence of the company could be on the line.
While payment delays, nonpayments, and other accounts receivable challenges happen often in the construction industry, it doesn’t mean design-build contractors are powerless in preventing delinquencies. Here are some ways design-build firms can deal with delinquent accounts.
1. Research your client’s history.
Prevention is better than cure and the same holds true in the construction history. Chasing a client to collect payment can be a messy affair, which you can avoid by taking the necessary precautions. The best time to start tackling the prospect of delinquent accounts is way before the project starts.
If you have never worked with a particular client before, take the time to do your research and get some references. Reviewing publicly-available information like notice of liens, court records, and even customer reviews can give you a snapshot of your client’s history. Check the Better Business Bureau as well as industry-specific groups and forums for any history of nonpayment.
The past is a good predictor of the future so if you find any indication of their inability to pay, you may be better off avoiding them.
2. Draft a solid contract.
The contract is the design-build firm’s best friend. To minimize the possibility of litigation due to a client’s nonpayment, it is important to have a contract that is prepared or reviewed by an attorney. There’s no document that can ensure a client’s full payment, but a solid contract with carefully crafted provisions can help contractors enforce their rights.
Ideally, the contract specifies the detailed scope of the work that the client expects to be completed along with the payment schedule and terms. Don’t set the company up for contract disputes down the road. If you did not get every detail written down in your contract, then the successful collection of a delinquent account is not guaranteed.
3. Ask for a portion of payment upfront.
Because the cycle between billing and collection is relatively long in the construction industry, always ask for a downpayment when negotiating the project terms. The downpayment is a sign of good faith and commitment on the part of the client, especially if several large items are needed prior to starting work.
If you are working with a new client, asking for a bigger portion of the payment is a good practice. For repeat clients, the deposit can be flexible.
4. Have a late payment policy.
As previously mentioned, it’s important to have every detail written down in the contract to ensure its enforcement. Design-build contractors who want to be able to charge late fees and penalties should include specific writing in the contract. A good credit and collection policy reflected in the contract will let clients know what to expect when they don’t pay.
5. Send regular invoices and follow-ups.
In design-build projects, it is advantageous to use a milestone payment schedule where the client pays in a series of lump sums based on the progress of the entire project. Specify a schedule that works with the client, and include it in the contract. This way, the client knows when to expect the bill to arrive. Be friendly yet firm in approaching your clients with regard to payment. Don’t hesitate to send a follow-up email in case the client hasn’t paid on the agreed-upon date.
Going after overdue accounts receivable can be time-consuming. To save time, contractors may use automated software that handles the collection for delinquent accounts and automatically sends invoices and follows ups when due dates arrive.
6. Protect your lien rights.
If the client fails to pay, consider filing a mechanics lien on the property. The mechanics lien is a legal remedy that lets you put a claim on the property in case of unpaid work. When a lien is put against a piece of property and the claimant remains unpaid, contractors can enforce foreclosure on the property to collect the proceeds of the sale.
Getting paid on time can be challenging, and sometimes doubly so for design-build firms. It requires putting systems in place even before you close the deal with a potential client. By doing due diligence, design-build companies can minimize instances of delinquent accounts.
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