Running a successful construction business takes a ton of knowledge, determination, and hard work. But why is it that some companies are able to grow and thrive while others stagnate or go out of business entirely?
Levelset’s recent 2022 Cash Flow & Payment Report revealed some key differences between large, successful contractors and smaller construction businesses. Of course, not every small business wants to become a construction industry powerhouse — but everyone wants to get paid for their work.
Keep reading to learn about four tips for getting paid in construction that are way more common among companies with more than 50 employees.
1. Know who you’re doing business with
Regardless of your role on a project, taking time to prequalify your potential customers can increase your chances of getting paid after finishing the job.
According to recent data, around 50% of all construction businesses report that working with financially stable customers is the most significant factor in getting paid on time.
However, smaller construction businesses are much less likely to prequalify their customers than larger businesses — and that could increase the risk of slow payment.
Just one-third of companies with 50 employees or fewer always or often prequalify customers — and nearly half rarely or never do. Meanwhile, two-thirds of large construction companies always or often prequalify — and only 15% rarely or never take the time to prequalify.
The steps to prequalify a potential customer are fairly straightforward:
- Review their payment profile and payment history.
- Get information about their credit history.
- Reach out to people who have worked with them in the past.
A bit of legwork on the front end can save time down the road waiting for payment on a job you’ve already finished.
Bottom line: Bigger construction companies are much more likely to prequalify their customers—and as a result, they also tend to get paid faster.
Learn more: How to prequalify a general contractor
2. Make yourself visible in the payment chain
It’s a truth universally acknowledged that a contractor who’s not visible in the payment chain is less likely to get paid.
A preliminary notice informs property owners that a contractor, supplier, or equipment lessor is working on a project. This simple document contains information about the property, the contractor, and the work that’s going to be done, and the notice is sent by certified mail to ensure the property owner receives it.
In some states preliminary notices are required to protect lien rights—but even when they aren’t required, preliminary notices can help you get paid faster by increasing your visibility in the payment chain.
Large, successful contractors understand the value of preliminary notices, and they’re also more likely to send them.
Look closely at how often larger companies send preliminary notices compared to smaller companies.
Larger companies tend to send preliminary notices on every project or at least situationally — like when they’re required for protecting lien rights. Overall, larger businesses are 30% more likely to send a preliminary notice than smaller businesses. On the other hand, smaller companies are more than twice as likely to rarely or never send a preliminary notice for any project.
Learning how to effectively use preliminary notices can help you improve communication, mitigate risk, and increase your chances of getting paid on time.
Bottom line: Preliminary notices are a very simple step that any contractor can take to increase their visibility and the likelihood of on-time payment for their work.
Learn more: Read the Ultimate Guide to Preliminary Notices
3. Create incentives for on-time payment
In an ideal world, payments for completed work would always arrive on time and in full — but unfortunately that’s often not the case. Offering incentives to encourage on-time payment is one strategy that construction businesses can use to potentially improve cash flow.
Options for incentives include both early and on-time payment discounts as well as late payment fees. Large contractors are more likely than small contractors to use these strategies to get paid.
Larger construction companies are 30% more likely to use some sort of payment incentive to encourage on-time or early payment.
While an early payment discount may seem counterintuitive, consider how much late payments could cost your business. Ultimately, construction companies that suffer from cash flow problems are unlikely to stay in business for long. Offering an early payment incentive and staying cash flow positive can help you move on more quickly to other jobs, expanding your reach over time.
Bottom line: Large and successful contractors realize the value of payment incentives and use them to increase their on-time payment rate.
4. Exercise your payment rights
At the end of the day, mechanics liens are the most powerful tool that contractors have to get paid for work they’ve completed. Owners do not want a lien against their property, so even the suggestion that a lien could be filed often speeds up the payment process.
That said, smaller construction companies are much less likely to file a mechanics lien—or even send a notice of intent to lien.
Notice the stark difference between the approaches taken by smaller and larger construction companies.
Nearly half of smaller businesses wouldn’t file a mechanics lien or even send a notice of intent to lien, but more than 80% of larger businesses would exercise their right to payment if payment was late.
Many smaller businesses fear that filing a mechanics lien may be too complex or not worth the effort, but that couldn’t be farther from the truth: We’ve created a step-by-step guide so that construction businesses in any state can learn how to file a mechanics lien.
Every contractor — regardless of the size of their business — deserves to get paid for the work they complete. Learn from the larger companies about the importance of exercising lien rights when the situation demands it.
Bottom line: Mechanics liens have been enshrined in law for centuries for a reason: Contractors deserve payment for their work. Follow the lead of successful contractors and file a mechanics lien if you’re not getting paid.
The path to success is available to all construction businesses
Taking a look at the largest and most successful construction companies reminds us of a core truth: Every construction business has access to the tools that will help them grow. To take the next step in your business, use these lessons and apply them to your projects.
Prequalification, preliminary notices, payment incentives, and lien rights are core business practices that can help you grow and get paid.