CONSTRUCTION Accounting ARTICLE -
Don’t wait to get paid
How to build a good collection process from the ground up
Target Audience: Construction Industry Professionals, Business Owners, Project Managers, Contractors, Construction Accountants
As the economy continues its slow and bumpy road to recovery, contractors can’t wait around for cash flow to improve. One way to help keep the dollars rolling in is to ensure you’re doing everything you can to get paid on time. Here are some tips on building a good collection process from the ground up.
It begins with the contract
Many payment problems begin before one dollar of cost is incurred on the job. To avoid misunderstandings — and to give yourself some power should a dispute arise — work with each client to develop a realistic payment plan and then include it in the job contract.
As you strive to accommodate your client’s situation, keep in mind that you’ll be paying wages, overhead, materials and equipment costs throughout the life of the project. Your goal should be for the scheduled payments to cover those costs. Make sure you know your customer’s payment cycle so you can time your bills to arrive before a cycle closes.
Follow-up is critical
When you send bills, pay attention to details and enclose appropriate documentation. If an invoice includes a change order, for example, send a copy of the approved order so the client understands what’s being billed. In other words, don’t give the customer any reason to delay payment because of needing additional clarification of the charges.
A week or two later, follow up each bill with a phone call or e-mail by asking whether the bill arrived and whether there are any questions. Then, thank the client for the business and remind him or her of the contract payment terms.
Make sure everyone involved in a project, from the project manager to the accounting clerks, knows when payments are due and whether they’ve been made. Your accounts receivable staff may have primary responsibility for monitoring past-due accounts, but collections should be a companywide concern.
Sales and project managers also should be aware of clients that are habitually late payers. Such knowledge will enable your staff to prevent further late payments from these customers and encourage them to pay more promptly.
When a payment is late, act quickly. Send another bill requesting immediate payment, and then call to ask when you can expect that payment. Remind the customer of the contract payment terms and, if feasible, offer to pick up a payment. If you can’t actually go get the payment, ask that the client send it to you by overnight delivery.
Persistence pays
Above all, don’t feel you’re being unreasonable in asking to be paid. Slow-paying customers are using your goodwill to give themselves interest-free loans — and the longer you let them slide, the harder it will be to collect.
If an account is more than 60 days past due, you may want to consider harsher measures. For example, notify the client that you’ll turn the account over to a collection agency if you don’t receive payment within a specified time (say, a week).
It’s possible that you’re slow to get paid because your reputation has preceded you: If you’re known to be forgiving when payments are late, your customers are more likely to let paying your bills slide to the bottom of their lists. Turning a couple of accounts over to collections will put everyone on notice that you’re serious about getting paid — and possibly move you to the top of the pile.
Bear in mind, however, that resorting to a collection agency could mean you may never work with that customer again. And in the construction business, where healthy working relationships are paramount, you could be burning a bridge you may need to cross in the future. So carefully weigh the pros and cons of this harsh measure before you act.
No one likes surprises
Surprises may be fun at a birthday party, but no one likes them on a construction project. Although you never know whether an owner will be a slow payer until it happens, by developing a process for handling slow payers now, you’ll be in a better position to follow up on the matter promptly.
Find out how our expertise in construction accounting can add value to your business. Email us or call us at 1 (888) 875-9770.
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