Getting paid in construction can be stressful. That’s true even when you run not just one – but two – successful construction businesses. In this article, the VP of two construction companies – a general contractor and subcontractor – shares three of his biggest secrets to get paid on construction projects.
Late Payments Hurt Cash Flow
Damien Massa is the Vice President of Floors Just For You and a GC sister company, Built Just For You. He handles sales, finances, marketing, and administrative work for both companies. In a previous life, Massa was the director of sales for a large building supply company. And yet, even with all that expertise, he says his businesses struggle with cash flow.
“Without a doubt, we do not get paid on time,” Massa says. He estimates the business only gets paid on time around 10-15% of the time. “That affects our ability to pay our suppliers and bank credit lines. It’s a never-ending cycle that I don’t see getting any better.”
Cash flow struggles aren’t anything new to construction companies. In a 2019 cash flow survey, nearly all construction companies (98%) said they’ve had to threaten a mechanics lien to get paid. But getting paid late isn’t just an inconvenience.
Ripple effects may cause lasting damage, as some businesses can’t afford to make payroll or invest in their company’s future. 51% of survey respondents said that cash flow issues are limiting their business growth.
Yet, like many business owners with a problem on their hands, Massa hasn’t given up. He has a strategy for getting more on-time — and occasionally early — payments, and he’s willing to share.
Secret #1: Accurate Estimates Are Construction’s Keystone
Before you can solve a problem, you have to identify it. For Massa, part of the issue is his business has so many competitors. “We stop work, and our client calls the next guy in line,” he says. So threatening to stop work until payment arrives isn’t an option.
Unfortunately, while Massa’s clients can get away with paying late, Massa cannot. That means he can’t put off paying for materials in the hopes that clients pay soon. “Many of our suppliers have a monopoly on a particular product, so if we don’t pay them, they won’t ship us materials,” he says.
Massa is stuck in the middle of two parties who hold all the cards. And he’s the one doing the work. And as you can imagine, that’s not an easy place to be. “I don’t think the stress will ever go away when collecting money,” Massa says. “Is it part of the business? Yes. Does it ever get easier? No!”
Massa knows that one piece of the problem is estimates. Estimates are like the trump card in construction poker. In the beginning, a too-high estimate can cause a company to lose out on a job. But giving an estimate that’s too low can cause even more damage. Increasing an estimate once, twice, or many times to account for higher costs requires client approval. The more expenses a client has to approve, the more likely there are to be setbacks. And those setbacks can easily delay payment.
Luckily, bad estimates aren’t incurable. Even labor costs, the most expensive variable, can be narrowed down through job costing and retrospective study. Best of all, with the right tools, creating an accurate estimate could be easier than you think.
Secret #2: Accurate Job Costing Leads To Better Estimates
One in 4 construction companies said they would go out of business if they made just two or three inaccurate estimates. Labor was the No. 1 choice for the hardest cost to estimate.
That’s a real-life problem for Massa, who says labor is his biggest variable. “We may think a deck should take five days, and we cost five days of labor. But then a tool breaks or guys get sick or the guys have a bad day or the customer changes the plan, and it takes seven days. I can’t go back to a client and ask for more money if we job costed wrong,” he says.
Regularly reviewing costs during the project is an important part of staying on-budget. Only 8% of construction project managers who don’t review their expenditures during a project said their estimates were accurate. Nearly 1 in 5 of those project managers said their profits were usually less than expected, according to a 2019 job costing report.
Massa is well-versed in job costing as a skill. He uses Material Cost Sheets and automated time tracking to outline each job’s labor and material costs. “Sometimes our cost may be on point, low, or high, but at the end, it evens out,” he says. But it’s the cost of labor that’s the toughest to pin down.
Massa uses TSheets by QuickBooks, a time tracking and job costing tool, to help with his labor estimates. He can look back on certain projects, time periods, crews, or individuals to see how long a past job took to complete. The software has reports and illustrations that make data more accessible.
“Never cost a job on what you think you should make. Cost a job knowing what you need to make while doing it competitively,” says Massa.
In the end, Massa has a fairly accurate idea of how much a project’s labor costs will be. He adds in the cost of materials and tops it off with a 5% increase to be safe. “Most of the time it’s needed,” he says.
Secret #3: Use Incentives, Penalties…and Persistence
Getting paid in construction is hard. According to the survey results, contractors almost never receive an up-front deposit. And in 2019, contractors had to wait an average of 83 days to get paid. Yet more than 3 out of 4 respondents said they rarely or never charge interest on late payments. To some business owners, that reality probably sounds all too familiar.
One strategy for success is incentivizing early payments while penalizing late payments. Another strategy is to present clients with an air-tight agreement.
Finally, there’s the strategy of persistence. It’s true: The squeaky wheel gets the grease. “Stay on top of the collection efforts, and stay in front of the customer,” says Massa. “The more you check in, the more they want to pay you because they get tired of hearing from you.”
Final Tips To Help Contractors Get Paid
Accurate estimates and over-communication aren’t the only tools construction companies can use to get paid on time. Other strategies include sending preliminary notice to improve transparency and communication, using prompt payment laws to your advantage, and sending Notice of Intent to Lien if a payment is late.
Filing a mechanics lien is certainly an effective tool to get paid. But in the end, it’s a solution for a problem, not a tool for prevention. To head off a payment problem before it happens, go into each job with eyes open, and a close-as-you-can-get estimate. Walk the client through an agreement that lays out specific payment dates and incentives for paying early. Send reminders before payment is due, reminders the day of, and reminders that include interest when the payment is late.
As Massa well knows, you may not always have control over your surroundings. You probably don’t hold all the cards. But if you can teach a client to pay on time every time, that’s a win that’s good for you, and better for business in the future.
Learn more about getting paid on construction projects