By Patrick Hogan, handle.com
Getting paid on time is one of the biggest struggles among contractors, subcontractors, and material suppliers in construction. With construction’s complex payment structures and ambiguous contract provisions, the problem with late payments continues to persist and trouble in the industry.
Late payment issues are even worse during major economic downturns. When nearly every company is going through tough financial roadblocks, payments are even more likely to get delayed.
But no matter the state of the economy, knowing how to deal with late payments should become a matter of policy for every contractor and subcontractor. Here are some notes to consider when putting up your standard practices for dealing with late payments:
1. Send payment deadline reminders
In an ideal scenario, your clients already know their payment deadlines. They should also know how often you issue your invoices and on which date you send them out. However, it would not hurt to still give them regular reminders.
You can send your clients automated emails or text messages to remind them of upcoming payment deadlines. If you do not have the mechanisms for sending auto-reminders, you can set internal reminders for yourself to reach out to your clients manually.
Prevention will always be better than cure, and so it is imperative that you do everything you can to keep late payments from happening. Even though late payments may be unavoidable in the construction industry, doing simple steps like sending payment reminders can make a big difference.
2. Send late payment notices
Once the infraction has been committed and payment has not arrived on time, you should send the erring clients a late payment notice.
When sending late payment notices, make sure that the details included in the notice are correct and accurate. Specify the amount due, the date the payment was originally due, and even the date when the invoice was served. Also specify the payment methods available so the clients know how they can submit their payments.
By specifying these important pieces of information, you are also able to ensure that you have your details organized. For instance, you should not send a late payment notice if the related invoices have not been served yet.
3. Charge late payment penalties
Charging late payment fines is another effective way to prevent late payments from occurring. A client is more likely to exert effort in avoiding payment delays if they know that they might get charged extra.
The key to imposing late payment penalties is transparency. Late payment fines should not be hidden from your clients, and your clients must be made aware of the consequences for late payment right when they sign the contracts.
Note that late payment charges should not be an additional source of revenue for your company. Charging late payment fines is a preventative measure to discourage your clients from paying late, and to penalize them accordingly if they fail to honor their payment obligations on time.
4. Send a Notice of Intent to Lien
Sending a Notice of Intent to Lien is like sending an ultimatum to your clients. When you send a Notice of Intent to Lien, you are essentially telling your clients that they need to pay or else you will file a mechanics lien.
Filing a mechanics lien is one of the most effective weapons against non-payment in the construction sector. When you file a mechanics lien, you put a public record against the property in question, which can greatly reduce the property’s market value.
Clients are therefore more cautious about mechanics liens. If the payment reminders and late payment notices did not get your clients’ attention, serving a Notice of Intent to Lien could.
Note that some states require serving a Notice of Intent to Lien prior to filing a mechanics lien. In states like Illinois, Pennsylvania, and Wisconsin, for example, serving a Notice of Intent to Lien is not just an option – failing to serve a Notice of Intent to Lien could dissolve your lien rights.
5. File a mechanics lien
If a client does not respond to your notices and if negotiations fall through, your next best recourse is to file a mechanics lien. As mentioned, filing a mechanics lien could reduce a property’s market value, which could then alert property owners and prompt them to pay up.
Even when owners fail to settle the outstanding payments, you can still recover your payment if the property gets foreclosed after you enforce your mechanics lien.
However, keep in mind that filing a mechanics lien is not necessarily a simple process. There are lien-related deadlines and requirements that are strictly implemented in each state. To file a mechanics lien successfully, make sure that you understand the rules and regulations applicable to your situation.
About the Author:
Patrick Hogan is the CEO of Handle.com, where they build software that helps contractors, subcontractors, and material suppliers with late payments. Handle.com also provides funding for construction businesses in the form of invoice factoring, material supply trade credit, and mechanics lien purchasing.
