Collecting overdue payment is nobody’s idea of a good time, and in many construction businesses, that task falls to the office manager. While a large construction business may have an entire credit and collections department, for many of the small-to-medium sized companies involved in construction, it’s the office manager who is forced to wear “collections” as one of their (too) many hats.

While it may not be the most fun part of the job, making sure you get paid is arguably the most important. Because of this, construction office managers should take care to understand collections best practices, recommended actions to take both proactively as well as when a payment becomes past due, to make sure you get paid what you have earned.

Proactive Collections Best Practices

There are many ways that construction companies can work to get paid before the invoice becomes past due, and we listed several of our favorites here:

Send Preliminary Notices

One of the construction industry participant’s best protections against late or nonpayment is through making sure that the parties with the money know that you are on the project. Promoting visibility through sending preliminary notice is one of the best ways to accomplish that essential task.

An added benefit of sending preliminary notice is that, in the states in which a preliminary notice is required, sending the notice protects the right to later file a lien, if needed. Remaining in a secured position not only provides protection down the road if a payment mishap occurs, but also prioritizes your invoices, firmly placing them into the “pay these guys first” pile, and not the “pay them when we get around to it” pile. If the choice comes down to paying a secured invoice or one that’s unsecured the choice is easy.

Use Clear & Detailed Invoices and Completely Fill Out Pay-Apps

It’s frustrating to try to figure out what is owed when you’re talking about a complex construction project, and when you force your customer to spend their precious time figuring out what your invoice says or checking to see if your pay-app is complete, that’s time you’re not getting paid, and time that may end up with the invoice waiting in limbo until either the customer feels they have time to deal with it or they give it back to you for clarification.

This is a waste of time. It’s important to make sure that each and every item for which you are requesting payment is specifically detailed in the invoice or pay-app. Providing clarity goes a long way in making sure you get paid and get paid on time.

Another offshoot of this is to make sure it is crystal clear how your customer should pay. If you take credit cards over the phone (and you really should), let them know. If they need to pay by check, make sure this is sufficiently set forth on the invoice itself. It’s a pain when a customer is ready to pay but gets thwarted by a hidden payment-type requirement.

You know that hole-in-the-wall taco stand that you wanted to try but when you got there it only took cash – and you only found out it only took cash once you got to the counter? Don’t be that taco stand.

Send Timely Invoices, and Re-Send Invoices When Necessary

In some cases you don’t have an option of when you request payment – the project may work with monthly disbursements and each payment request must meet this timing standard. However, when you have the opportunity, it is crucial to send invoices or other requests for payment with enough lead-time to allow your customers to pay on time. Don’t wait until the payment is nearly due, scramble to get an invoice sent, and be frustrated that the payment didn’t make it when you wanted it. Give your customer time to process the invoice, and give yourself time to re-send an invoice if needed as a reminder that the payment is due and should be forthcoming. Invoices get misplaced – it’s a fact of life – so giving yourself time to re-send prior to the payment becoming overdue can be helpful.

When Payment Is Past Due – You Earned It, Go Get It

Once you have done the work and seen the due date for payment come and go, it’s time to get a bit more serious. While there are still plenty of innocent mistakes or oversights that can result in overdue payment, the longer the payment stays outstanding, the less likely it is that you will ever recover it.

Taking prompt action when the debt becomes overdue can mean the difference between getting paid and writing the amount of as bad/unrecoverable debt.

Send a Notice of Intent to Lien

Mechanics liens are powerful tools to make sure you get paid. In fact, they are so powerful that sometimes the mere “threat” of filing a mechanics lien is enough to get you paid.

Setting a policy to send a notice of intent to lien after a debt becomes a certain number of days overdue is an important part of a complete notice and lien policy and will do a considerable amount to get you paid.

Taking this step before filing a lien gives the property owner a chance to put pressure on the non-paying party (or pay themselves) and avoid the mess of having a lien encumber their property. However, sometimes the notice of intent isn’t enough, and the next step must be taken.


Essential Reading:

What Is a Notice of Intent to Lien and Should You Send One? | by Levelset CEO Scott Wolfe


File a Lien (or Make a Bond Claim)

Participants in the construction industry are lucky because the law in every state allows them to virtually guarantee payment provided they follow the necessary steps. Mechanics liens are an involuntary security right in the property being improved, and can result in the sale of the property to satisfy the debt if the claimant remains unpaid.

This is strong incentive to make sure the claimant is paid in a timely fashion, and in full. On public projects, or exceptionally large commercial projects, there may be a payment bond that takes the place of the property to provide security for payment – but this works in a very similar way.

There are many ways that mechanics liens can work to get you paid.

Keep Good Records

In the event of a payment dispute the party with the best back-up is usually in the best position. The more detailed you are with records, including specific invoices, logs, pictures, time sheets, etc., the better your position to recover in a dispute. Good record keeping is essential whether or not you file a lien, but it is important to be able to prove what you did to improve the property in the event you need to enforce a mechanics lien or otherwise file suit.

File a Lawsuit / Enforce the Lien Claim

While this is (and should be) a last resort, if you cannot prompt payment by any other means, you may be forced to file a lawsuit to recover. This may be a foreclosure/lien enforcement lawsuit, a breach of contract suit, a claim for unjust enrichment, or more.

The important thing to know, though, is that lawsuits are long, expensive, and not a lot of fun. Following the best practices above should virtually eliminate your need to ever make it to this step – but it’s worth keeping a relationship with a construction attorney just in case.

After all, even if you don’t ever have to file a lawsuit, it never hurts to be prepared.

Talk to Us

If you’re having trouble getting paid on a project, let’s talk about getting you paid.

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Collections Best Practices for Office Managers in Construction (Tips and Tricks)
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In construction, office managers are often responsible for collections | Collections best practices for office managers in the construction industry
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levelset
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