How to Control and Influence DSO with Lien Rights

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Martin Roth
Martin Roth
8 years experience

Watch part 2 of our Credit Manager Coaching Series and become the payment hero of your construction company.

Martin Roth, Levelset Chief Revenue Officer, has over 8 years of experience helping credit managers and controllers successfully deal with slow payment. After working with credit managers and controllers at some of the largest suppliers and contractors in the country, Martin knows the tips & tricks to make your life easier and your payments smoother.

This 3 session virtual class is designed to help credit managers see the processes and practices that help credit departments level up.

  • Part 1: How Distributors Can Identify Late Payment Before it Happens (Watch Now)
  • Part 2: How to Control and Influence DSO with Lien Rights (Watch Now)
  • Part 3: Eliminating Overdue Invoices with Data (Watch Now)

Full Transcript

Good morning if you’re on the West coast. Welcome to our second installment of the three part series where we’re going to talk about accelerating cash flow for suppliers and distributors and contractors by using lean rights and data and all the good stuff. For those of you who we haven’t met before. My name is Martin Roth. I’m the chief revenue officer here at level-set. I’ve been at this for about eight years . So I’ve worked with hundreds of contractors and suppliers to help them use lien rights and navigate the construction payment process. I wouldn’t call myself an expert, but I have definitely seen this work well, and I’ve seen it work poorly. And today we’re going to talk mostly about how to do it well. Here’s what we’re going to talk about today. How to control and influence DSO with lien rights, a DSO for the uninitiated, is Days Sales Outstanding.

 

It’s a very common thing for suppliers and distributors to look at when they think about their aging. And I want to recap some of this stuff that we talked about last week for why construction payment is messy. So this is what you’re going to learn today. You should be able to walk away with things that you can apply to your business this afternoon. You go and look at your AR and you go to your management meeting and you think about how do we get more cash into the business? So, the first thing we’re going to talk about is how do contractors prioritize who gets paid first on the job? It’s really thinking about how the prime or the owner decides who gets paid first, how to get in front of that payment line to make sure your  invoices are prioritized over others. And then finally, how to simplify the preliminary notice and lien waiver process to get paid faster.

 

Fair warning I’m going to make this as objective as I can. I am going to touch on some Levelset elements. We have a product that helps suppliers manage the lien rights process. So it’s not going to be a total brochure. I promise. Last time when we talked with this group, we looked at the national construction payment report, and this is something that our team does once a year, where we pull a survey together and we have a significant number of responses. So there were over 500 respondents, contractors, general contractors suppliers. And we learned a ton about how contractors are struggling to get paid or just what their best practices are with managing the payment process. And it’s especially important now in today’s economy with COVID, you know, everybody’s balance sheets are tight, their P and L’s are being scrutinized at all levels of management. And so working capital is going to continue to be important over the next 18 months.

 

Even more important than it already is, because balance sheets are going to get stressed in construction. In our survey, just a few key highlights, 80% of contractors spend a substantial amount of time chasing down payments. So that tells us that this is a thing that is on the minds of most companies in construction. For the suppliers that are in the audience, your customers are stressing about getting paid and they’re spending a significant amount of time chasing down payments. 84% of contractors experienced delays on some or all projects. This is commonplace in construction, turns out it’s pretty difficult to build buildings and delays happen. They have it for all kinds of reasons, whether workmanship disputes, inventory issues with suppliers, all kinds of reasons why delays happen, but they, they, they are on 84%, which is an overwhelming majority of, of contractors experienced delays. And over half 54% say that payment delays are caused usually by slow payment above them.

 

We see this often with pay if paid and pay when paid clauses in contracts, where contractors are waiting on payment from the owner. We see it, especially with suppliers where subs are waiting for payment from the general contractor, but over half of the respondents say that payment delays are caused by slow payment above them. We’re going to talk specifically about how you can navigate through that, to get your payments in front of the line. We’ll quickly go through why it is so difficult to get paid on a construction project? This is really important to understand. Construction projects are complex from the very start, and we’re going to draw out what a simple project looks like in all of its complexity. And I understand that that’s an oxymoron. A simple project: A property owner wants to build a strip mall.

 

So they have to go to a lender and borrow the money. They also have title companies, and I’m sure it is that they’re working to ensure the job. Then they have a general contractor that they hired. They may be working with an architecture or an architect or a construction manager and the bond, the bonding companies for those entities. And then they hire subcontractors as specialty subcontractors who are going to come and do the specific work on the job. That’s required. The flooring, the drywall, the plumbing, the HVAC, the electrical, all of the specialty subcontractors get involved in the job. And the average, the average number of subs on a job for a normal commercial job in our system, we have hundreds and hundreds and hundreds of thousands of commercial projects in our system right now. And we look at this data from behind the scenes just to see what are the trends and the average number of subcontractors on a drop job is north of 25.

 

And so significant complexity, even for smaller deal sizes are smaller project sizes. And then finally those subcontractors are hiring sub sub subcontractors. They’re hiring suppliers that they’re buying material from to put onto the project. And so the project becomes very complex very quickly, and everybody needs to get paid. Right? Each project is a thumbprint, bringing different sizes of companies together, different levels of sophistication together. You may have a big commercial general contractor, a family owned business that’s a specialty subcontractor and a supplier. That’s a multinational corporation, like a large equipment rental company, or a large plumbing supplier. I’m sure you can fill your mind with some examples of companies that you know, or maybe that you work at that fall into that category. And each company project is like a blueprint. That same group of people is very unlikely to come together in exactly the same way on another project.

 

And everybody’s relying on each other to collaborate, to make the project successful and complete on time and under budget. So if everybody starts the project in earnest and wants to work together to complete on time and under budget, why does slow payment happen? And here’s the important thing to understand on construction problem projects, payment problems on the bottom at the supplier and sub sub contractor level, they start up here on the project. They start usually at the general contractor or subcontractor level. In most cases, it’s related to getting the payment application from the sub to the GC the right way, filled out completely so that the GC can deliver the payment application to the owner. Right? And there’s obviously different circumstances with public projects, definitely with federal projects. And so this is, this is kind of a general overview of why slow payment happens is because there’s a lot of paperwork that gets in the way of making sure that you get paid on the job.

 

And for a supplier who’s delivering material to a sub relying on that sub to submit the right pay application on time and accurately with all the lien waivers intact. And for that  subs to give it to the GC and the GC to give it to the owner all on time, in order for money to come down, it’s a lot of coordination and that can lead to slow payment, right? The check is in the mail? Who has heard this line before from a customer. I know that we’ve heard it from our customers. It is ubiquitous across all industries, but it is especially true in construction, which by the way, the construction industry is one of the few industries that’s left with a, a significant percentage of payments being transacted by physical check. And it’s an interesting opportunity for this industry. There’s a lot of checks changing hands in this industry. But this line, “the check is in the mail” you hear that a lot whenever you’re following up with a contractor who owes money and the way to get through that, the way to get around that check is in the mail status.

 

It’s important to understand how they decide who they’re paying and when they get paid. So the first thing is how do contractors prioritize who gets paid first? What do owners want? Owners want the job done on time and under budget? And they don’t want to overpay for work that hasn’t been done or work that’s been done. They don’t want to overpay for. They don’t want to pay for any work that hasn’t been done. So when a subcontractor submits to a general contractor that they’ve done 60% of the installation of plumbing, but they’ve only done 40%, the owner is going to want an inspector to go out and make sure that they are paying only for the amount of plumbing that’s been installed.

 

And that’s an important step. They get the job done on time and under budget, and they don’t want to overpay general contractors need the job to be free and clear of liens. And they’re in most cases, unless they are self-performing. In most cases, they are acting as a manager for the construction job to coordinate all of the work from all the subs and the delivery from the suppliers, right? The subcontractors, they need cash flow to finish the job doesn’t happen all the time, but it is definitely common that subcontractors use future projects or the next project to fund the current job that they’re on. It is not recommended. You’re supposed to keep the money on the job within the job, but especially in an economy like this, where cash is strapped, subcontractors may use their balance sheet to fund the current job they’re on. And that’s something to be very conscious of as you decide who you’re working with and as you work through those issues with the partners on the project.

 

And then finally suppliers, because of all this suppliers are often left holding on to debt for far too long on the construction project. So going back to the national construction payment report, I want to pull this out because I think it’s really important. And I want to draw our attention. This is about halfway through the construction payment report. And it talks about how contractors don’t protect their payments. They don’t protect their lien rights specifically. It says, ultimately contractors are afraid to demand payment. While some said that they lean that the lien claim process was complicated. You know, that 60% said, they’re not doing it because it’s complicated or expensive. And another 16%, as I said, that is expensive. A majority said they were afraid to lose a customer. There’s really important constructions of business, just like all businesses it’s built on relationships and liens are nuclear.

 

Now, when you hit the lien button, it is a shot across the bow for that general contractor, that owner, I mean, it is a very, very emotional and visceral thing in the market. And so you want to make sure you’re only filing liens when you absolutely have to. And most contractors are afraid to protect our lien rights because they don’t want to lose a customer. We see it all the time with our supplier customers, every distributor or supplier or subcontractor that we work with who protects their lien rights. There is some subset of customers where they don’t want to protect their lien rights. And that’s totally understandable. And that makes sense that if somebody you’ve been doing business with for 25 years or who, maybe you have a national contract with them, and if, if you have to file a lien on the project, you got bigger problems than just that one project.

 

That’s a very common thing. But for all of the other projects, where there is some risk that, you know, lean rights, they are not inherently a bad thing. And as a process, because that is the recourse, that is a security instrument by which you can secure the amount that you’re owed on the project, there’s an ebook that’s really, really popular that we wrote many years ago, it’s called 17 ways a mechanic’s lien can get you paid. And most of them, most of those 17 ways come before the lien actually gets filed, right? So there’s a lot of advantages to understanding lien rights and using them to your advantage, to get to the front of the payment line. So how do contractors prioritize getting paid? Remember we know what owners care about, what GCs care about with subs and what suppliers care about. Primes and owners, GCs and owners prioritize subs and suppliers who protect our lien rights full stop.

 

Like that happens if a subcontractor or supplier is protecting the lien rights on the job, you have the owner’s attention. Think about California, for example, or Florida or any other state that has a preliminary notice or a notice to the owner, Florida great example. It’s called a notice to owner. The property developers and the ABC in the AGC lobbied to get the legislation change. So that notices existed. Owners want suppliers to send notice. They want suppliers to send notice and subcontractors to send notice so they know that you’re on the job. Remember owners don’t want to pay for work that hasn’t been done, and they don’t want to overpay for work that hasn’t been done. And they definitely want to know. So who is doing work and who’s supplying material on the construction project. And the only way for them to know is the general contractor and the sub contractor can supply that information, but that’s difficult, right, because the job is going on and it’s not always communicated what you have control over.

 

If you’re the one who needs to protect the lien rights, you can make sure that that owner knows you’re on the job. And all it’s doing is saying, Hey, I’m on the job. I’m owed $10,000 for the material that I delivered. And if I don’t get paid, I have the right to file a lien. What owners do with this information? They put it in a stack, sometimes a physical stack on their desk. Hopefully they’re using a digital process and putting it in a file on their computer. But they use that to know who they need to collect lien waivers from, to make sure that those parties were paid on the project, because they’re not going to release a draw unless they know that they have lien rights waived for the amount that they’re paying from the draw.

 

Right? So they’re going to prioritize. Owners are going to prioritize who gets paid first, which, which pay apps are going to get approved. And they’re going to prioritize it based on which substance suppliers are protecting their lien rights. Right? If they receive the notice, they know that the contractor supplier has an organized credit policy and a plan, and they know that a liens going to happen if they don’t get paid. It’s the prudent thing. It’s just like, it’s similar to insurance or any other security instrument. That’s going to say, save you from the risk. Right? And like we said, owners know the project will get liened properly if the payment isn’t made. So that’s why they prioritize it. This was from a webinar we did almost a year ago. And it’s a funny slide because it’s so true.

 

No one walks onto a job and thinks I can’t wait to lien this job. Like a hundred percent of people hate liens. It’s a true, true stat. Nobody enjoys filing a lien, but it’s a necessary part of navigating the construction payment process the right way. And I’ll give you an example. This is a customer of ours Danetta Haynes. She’s a controller at international marble industries, which has a supplier in Georgia. They operate nationwide. They had AR that was 90 days or, or older and that was a problem they had to contend with. So this gets to day sales outstanding. One of the best ways to reduce DSO is to get rid of that age. That super aging death overdue past 90. And so they had a task to contend with. She knew that she needed to present the lien rights and that would accelerate payment for her, but they needed to get the right information on the project.

 

They needed to take the right steps of getting paid by staying on top of deadlines, sending notices, keeping on top of the reminders. And then when a nonpayment issue happened, they needed to escalate those claims and make sure that they were sending the notice of intent to lien. They were filing the lien on time and within the deadline, I won’t bore you with the action plan, but we did partner with Levelset to help her stay on top of deadlines and send the right paperwork and get the right research into our hands and support her with help. And that’s exactly what happened with Denetta was that they cut their delinquent receivables in half by 50%, which is a significant movement when you’re looking at an aging portfolio. And that opportunity is definitely available to you too. If you’re in a situation where you have a lot of overdue past 90.

 

And so whatever system you use, whether you use Levelset or you use some other lien service provider, or you just have a homegrown process when you’re using a Microsoft spreadsheet. I would recommend moving off of the spreadsheet and Microsoft word. But if nothing else, you want to make sure that you’re tracking your deadlines. You want to make sure that you have the right project information, and you want to make sure you’re sending notices on every single project so that your payment can get prioritized. Right. So how do you actually, in front of the payment line, it’s three steps. We call it the S.E.T method. It’s an acronym, but the first is S.E.T the right expectation. See everybody on the project. Start by making sure that you’re seen by the owner and the GC. Send their preliminary notice on every project. We recommend even sending a voluntary, preliminary notice.

 

And in States where the notice is not required, because the owner still cares about the suppliers in those States, too. Even if the legislation doesn’t require that a notice be sent, send it electronically. If you can get the email address for the owner, somehow make sure that you’re seen on the job. The second step is make sure that you have the paperwork straight, make sure that you review the contractors on the job to identify which projects are at high risk. Make sure you make it easy for your customer to receive waivers, to receive the notices and make sure that you’re tracking your lien deadlines so that you don’t miss a deadline and forego lien rights unintentionally or, or on accident. And then finally, when issues do come up, because we know that construction projects do get delayed. When issues come up, try to avoid them by sending payment reminders, escalating the issue with a notice of intent, to lien, to avoid the lien, getting filed and try to talk it out with your customer or with their customer’s customer to try to avoid having to follow that lead, do everything you can to try to avoid, to have filing the lien so that you can get paid.

 

You know and in some cases the squeaky wheel does get the grease as they say, but you could you have a very strong backbone with the lien process that you can stand on. That says “look we don’t want to have to file the lien. Let’s resolve this so we don’t have to go down that path.” You have a lot available to you. So how do you simplify the notice and waiver process? The first thing is make sure to research the lien laws for the project that you’re working on, or the state that you’re operating in, figure out if a notice is required and who it needs to be sent to figure out if the waiver, the lien waiver is, is statutory and language. So is there a specific language that needs to go in the waiver or is it kinda like the wild West?

 

There’s a handful of States like 12 or 15 States that have statutory language on the waivers. All the rest of the States it’s a little more open-ended. We have great resources here on Levelset.com. You can go to our learning center. We have a ton of free resources that you can use to figure out what the process is for your state or for your project. We have enough of a lien deadline calculator that you can use to calculate what the lien deadline is for a project that you’re working on. So don’t ignore the free resources that you have, but by all means, make sure that you understand the rules or the lien laws for the project or state that you’re working in. The next thing you do is you need to make sure that your project information is right.

 

So when you’re working with a contractor, you get a purchase order, use a job info sheet, job information sheet to collect the information on the project that’s required like the owner, the they’re not going to have the legal property description most likely, but they can at least give you what type of project is it? Is it commercial or residential? Do we know who the lender is? Who is the general contractor? As much as you can gather about that project at the time of sale, that is, that’s obviously ideal. It’s not always possible because the sales team’s out there trying to drum up business, but implement processes where you can collect that information and then implement processes on the backside where you can backfill that information. When you, when you don’t get the general contractor, for example. And then finally you said, right, analogy to exchange, track exchange, and track your documents and deadlines, make it easy to send and receive they’ve notices and waivers.

 

Now you’ve got to put notices in the mail by certified mail because it’s required by law. In most States, whenever a notice was required, but otherwise, how can you use the tools, the technology that’s available to you to make it very easy to exchange those documents, to track deadlines, to send reminders to you so that you don’t have to use post it notes and a Microsoft XL to remember what’s coming up. There is definitely technology that is available to you to make this easier for you. So get paid first on the project, by using your lien rights, to prioritize your invoices. It’s a lot of ways to, to get the processes right, for your lien rights. We can certainly help. Obviously we want to help if that’s interesting to you and we can talk about that in a second. So if you remember nothing else, these are the protests from Levelset. Write these down, take a screenshot, mark it down in your notebook.

 

Talk about it at your next meeting about aging. The one, the number one thing is you want to send a preliminary notice at the start of every project so that the owner knows that you’re on the project. The second thing is you want to exchange lien waivers electronically, right? Preferably with a tool like Levelset that makes it very easy, easy to collect signature. We’ve seen companies use DocuSign or other types of elect electronic resentment, but use technology to exchange those documents. The other thing is send a notice of intent to lien 20 days before the lien deadline. This is a killer move that does a great job to accelerate payment without having to file lien. The threat of lien in many cases is enough to get paid on time. And usually it’s just a signal that the owner didn’t even know that this payment was delinquent.

 

You can collaborate with your customer to make sure that it’s communicated in a tactful way, but that’s a great practice to be in. And then finally talk it out to resolve issues. But if that fails, make sure to file the lien within the deadline. You don’t want to lose that lien lien, right? Because it is your security to make sure that you do get paid. With that if you want to learn more, or if you want to see how Levelset can help you with this stuff, you go to levelset.com/features. You can request a meeting. You can reach out to me too Martin@levelset.com. We definitely want to work with you and help you get this process straight. We’ve done this with literally thousands of contractors. I’ve personally worked with hundreds of them over the years. This stuff is not rocket science. There’s definitely a path forward. It has a direct influence on DSO and overdue past 90. And it’s really important that we get a good process in place over the next 18 months. It’s going to be super critical to make sure that working capital stays in the business so that you can fund your business. We have another webinar coming up in two weeks. So make sure that you sign up, tell your friends we’re going to continue on the same theme and we’ll see you then. Thank you everybody.