Editor’s note: Poor construction cash flow can lead to the downfall of construction business during any economy, good or bad. As the risk of bankruptcy increases in the age of COVID-19, keeping cash flow positive is critical to survival. While these cash management strategies are important generally, they are even more essential during the current uncertain environment. To learn more, visit Levelset’s Coronavirus Help Center, or browse our library of articles about managing cash flow in construction.
Construction companies are often faced with non-payment for their services and are forced to seek legal avenues in order to receive payment from clients. This is the reason behind the lien process, notice of commencement services and many of the contractual matters that are involved with hiring a construction contractor. Almost anyone in a construction office can tell you that the onset of a job brings an entire filing cabinet of paperwork for signatures and in need of a notary. Those same office employees will tell you that you do not ever want to start a job without your paperwork in order.
Table of Contents
Prepare Your Business for Positive Cash Flow
You may never need to file a construction lien against a property owner. However, when you do, you will immediately understand the importance of signed bids, approvals, notice of commencements, and invoices documenting any payments and outstanding balances. It is important to have every necessary change order documented and signed, and you cannot waver on any of these documents, no matter how large or small the job may be.
Your payment terms need to outline a setup that will never leave you more than 50% owed in credit you have extended. 20% acceptance, 30% mid-walk, 50% at completion is common in the industry, but the more you can collect prior to completion, the less you’ll be fighting for should the property owner decides they aren’t paying.
If you are able to collect 50% plus materials upfront, by all means, do so. The fact of the matter is you want to minimize your total loss if for some reason the property owner decides for whatever reason that they don’t want to uphold their end of the contract.
Invoice The Moment You Do The Walk Through
The best time to get the invoice to the property owner? The time you do the walk through, of course. They may have a punch list, and that’s ok because you have your construction crew on-site cleaning up, packing tools, and completing your punch list. Any punch that the property owner has shouldn’t be a problem, because when the project manager is on-site, punch items are normally quickly detected.
Property owners know that once the job is completed, there isn’t much you can do outside of a lien when it comes to being paid for the work you have done. Present your invoice for payment immediately upon the completion of the final walk through. If you can do so, forward the final invoice to your contact if performing corporate work so that they have a chance to look it over before you arrive to do the final walk with them.
In the case the job is residential, set an appointment with the homeowner for the final walk. Let them know that you’ll be presenting them with an invoice for the remaining percentage due, and that upon signing off on the job, payment is required. It is much easier to get a final payment when you’re dealing with someone in person because phone tag and endless voicemails just leave both parties frustrated.
Learn the Prompt Payment Laws That Protect Cash Flow
Depending on the location of the construction company, there are laws regarding the time that must elapse before a lien can be filed against a property owner. A construction company must be familiar with all of the laws governing these time periods, because incorrectly filed liens or filing after a certain time period can leave a construction company with no legal recourse and no way to recover their funds.
Prompt payment laws can be quite tricky, and they’re not written in layman’s terms. However, there are many seminars and classes that focus on these laws and guidelines, and they are highly recommended for those that need an in-depth understanding of exactly what recourse you have if your invoices aren’t promptly paid.
Stay Up-To-Date on Payment Laws
Laws are always changing based on the actions of those affecting the laws. A construction company cannot afford to be unaware of a change in mechanics lien laws, or any other information that affects the prompt payment of construction invoices. Because of the nature of the business, simply buying the materials to complete a job, and not being able to recover that money could potentially be devastating to a construction company.
It needs to be the responsibility of the business owner or a designated representative to ensure that they are constantly aware of industry news and changes to the construction laws governing their state. There are a multitude of classes and seminars that focus on staying up to date on construction payment laws, lien laws, and your legal rights and responsibilities as a contractor. It is absolutely imperative to be up to speed on all of the laws and rights you have as a contractor.
Managing Lien Rights Ensures Positive Cash Flow
If you aren’t aware of exactly what your state requires to file a lien against the property you have performed the construction work on, you are already at a huge disadvantage. You need to know the lien laws of your state backward and forward, and ensure that all paperwork that is required is completed, notarized if necessary, and ready to walk down to the courthouse in the legal guidelines.
You should know your legal options before signing any release or waiver of lien forms, or any other legal documents that the property owner has requested you to sign. Never authorize an on-site employee to sign off on legal documents, and be sure that you or your authorized representative are the only legal signatures on financial and legal documents. Again, construction company owners or their designated rep should have zero gray areas when it comes to familiarity with the lien laws governing the area their business operates inside of.