Getting Paid in Construction: Five Recommendations for Contractors
One of the most challenging but important aspects of managing a construction business is ensuring you get paid for your hard work. Being proactive and organized to ensure a steady cash flow is critical to fulfilling financial obligations, including being able to purchase necessary materials for projects and to be able to timely pay subcontractors and suppliers. It also allows contractors to take on new projects without any danger of going in the red.
Yet, securing payment is still a major challenge for many contractors. The good news is that there are certain actions that contractors can take action to protect their business against these issues. We have prepared the following five recommendations to help contractors get the payments they are owed:
1. Have a Written Contract
Although hand-shake agreements are still common in the construction industry, these informal agreements routinely cause headaches and present challenges when a payment dispute arises. For that reason, we recommend entering into a written agreement for each project that clearly outlines the specific payment terms and obligations of the parties. In the written agreement, we recommend including the following:
- timing requirements for payments (for example, payment must be received within 30 days of invoicing);
- the right to recover interest in the event of a delayed payment;
- outlining the preferred or required method of payment; and
- building in the right to suspend work in the event of delayed payment or nonpayment.
Entering into a written agreement that clearly outlines the payment obligations of the parties will be beneficial if a payment dispute arises. However, as with anything, just having a contract is not enough: you have to use it effectively. To do this, make sure you abide by all the terms and conditions, and timely enforce the terms and conditions when you believe the other party is not complying with the contract.
2. Implement Timely and Consistent Invoicing Practices
One of the easiest ways to get paid faster in construction is to submit payment applications and/or invoices on time and with as much detail as possible, including providing any backup or supporting documentation. Double-check what your contract requires, and provide the required information at a minimum. In addition to getting detailed invoices out the door in a timely manner, it is beneficial to maintain an organized system to make sure your team is able to internally track what is due and owing and when for each project.
3. Be Vigilant in Following Up on Delinquent Payments
In a perfect world, an owner or customer would automatically pay your invoice or pay application without needing to be asked again. However, customers regularly forget dates, miss deadlines, and are disorganized. For that reason, it is important for contractors to track the invoice payment period and ensure they follow up promptly and appropriately. The follow-up method can be in several forms and is fact-dependent on the contractor’s relationship with the customer, but this follow-up can be in the form of an email, a standard written letter, or a telephone call. To the extent appropriate, it may be beneficial to suggest that your legal team will be involved if payment is not received appropriately, as this can create some leverage for those wanting to avoid a payment dispute.
4. Monitor the Deadline to File a Construction Lien and File a Lien as Needed
A construction lien is a claim made against a property by a contractor or subcontractor who has not been paid for work done on that property. The construction lien process varies state by state but can be a powerful tool for contractors to use to secure an outstanding payment. Thus, we recommend being familiar with the applicable state’s rules/timelines for filing a lien. For guidance on Nebraska’s Construction Lien Act, please see the article published by Koley Jessen here.
It is important to note that some states require serving a notice of intent to lien, which acts as a final warning before a lien is filed and provides the paying party one last chance to settle the bill before they face a construction lien. Even if a notice of intent is not required, it can still be an effective tool for collecting payment because parties typically want to avoid having a lien filed. In addition to construction liens, some projects have other legal avenues/sources of payment, such as a payment bond. If the project has a payment bond in place, a contractor or subcontractor may pursue a claim against the applicable bond for payment.
5. Engage Legal and Commence Formal Collection Processes
If your collection efforts are unsuccessful, it may be beneficial to engage counsel to pursue more formal collection efforts on your behalf. Your attorney can advise you on appropriate actions to take, act as your representative to the client, which can help to provide extra incentive to pay, or even negotiate a new payment plan that works for everyone.
Implementing the foregoing five recommendations will improve your chances of prompt and full payment on projects. However, if you are in a situation where you are not getting paid for the work you have done or if you have any questions regarding collecting on construction projects, please do not hesitate to contact one of the members of Koley Jessen’s Construction Industry Practice for further guidance and assistance.