0394: A Contractors Guide To Dealing With Customers Who Refuse To Pay

This Podcast Is Episode Number 0394, And It's About A Contractors Guide To Dealing With Customers Who Refuse To Pay All construction contractors have experienced bad debt's financial pain, which is defined as a customer who refuses to pay no matter what you do.   I've been there before, and it will probably happen again in the future. Owning and operating any business, including accounting, means sometimes you provide goods and services and not get paid.   When you sat for an exam or a school test and knew the material forwards and backward, it was fast and easy. The exams and tests for the classes you struggled with were the opposite.  

In your construction company, it is the same. It would help if you had the answers to develop understanding, which allows us all to let go of the past and move forward.

Separate The Good From The Bad

Not everyone who never pays you is a bad person. Sometimes things happen which are beyond their control.

We have clients who have experienced situations beyond their control in all of our companies, and when it is legitimate, we have been known to issue a letter stating the debt is canceled, and they owe us nothing.

Oddly enough, most of them paid the debt years later, and all of them were very appreciative that we treated them with courtesy and respect.

Some people are just troublesome, like Bad Bookkeepers, and I would rather be the person who was taken advantage of than the one who took advantage. Do whatever you think is within reason to collect the debt and no more.

The Two Percent Rule

Some cab drivers in New York City have said 2% of their passengers will attempt not to pay for the ride. After more than thirty years of being involved in construction and contractors bookkeeping services, I have seen the following regarding bad construction debt.

The one-person construction business has little or no bad debt; however, as we know, they do not make much money, and that is O.K.

Contractors Are Not Bankers

You are not a bank, so never, ever use your high-interest credit cards and supplier accounts to provide financing to your customers in the form of offering a lot of labor, material, subcontractors, and rental equipment, hoping to get paid later on down the road.

You can recommend financing by getting a merchant account setup at a bank or credit union that will offer to loan your construction client's money for small projects. Your construction client signs paperwork with the lender; you do the work and get paid.

Accepting credit cards is another way to offer to finance, and it is like having an "Electronic Armored Car" on standby 24 hours a day, seven days a week, ready to automatically take your money to your bank. If your QuickBooks is set up correctly, an invoice can be emailed to your customer or clients, and when they open it, there is an option for them to pay by credit card immediately.

Having owned and operated several construction businesses, I know how important cash flow is to any business's success or failure, especially construction companies like yours.

We have contractor clients who took a while to understand why I was hard on them and kept saying, "Get The Money." Once they realized what real peace of mind was - paying all the bills on time, yet still having money left over for vacations, toys, and support their favorite charity - it became crystal clear.

Ask and receive job deposits and progress payments so that you are always using "Other People's Money" (O.P.M.) to pay for the labor, material, subcontractors, rental equipment, and overhead of their construction projects.

Paradigm Shift

As a construction company owner grows their company, sometimes they experience "Growing Pains," which is another way to say "Paradigm Shift" while they learn what worked in the "Dog And Pickup" stage does not work in the "Professional Contractor" stage.

It makes sense that sometimes, contractors want to use "leverage" to get paid; however, you could open yourself up to unintended consequences. The Universe is always in balance, which means if you have done the work with integrity, you will be repaid one way or another, so perhaps consider letting them off the hook and forgetting all about it.

The 80-20 Rule

Finally, consider the 80/20 rule, which means investing your time and energy in the highest and best use, for example:

Which action is likely to yield the highest return on your investment of time and energy and put the most money in the bank?

#1 Chasing a client who cannot or will not pay

#2 Focusing on your top 20% clients and finding more of them

We work with many contractors, remodeling contractors, and tradespeople, and we coach the ones who listen to not sweat the small stuff and instead focus on developing a system that can help you win the big game.

Which Is Better?

#1 Annual sales of $250,000 with $45,000 net income including your salary           

#2 Annual sales of $2,500,000 with $350,000 net income including your salary

The right answer is whichever one lets you sleep well at night!

We show only the necessary tools to open your mind to the possibilities that are available to you. The best finish carpentry tools in a golf professional's hands without proper carpentry training will not produce anything near to what a skilled finish carpenter can. The same can be said about the best construction business consulting and accounting tools in an experienced finish carpenter's hands. Moreover, I say that with respect and admiration for everyone in construction.

Final thoughts

When You Become A Client - Then, we can tap into our knowledge and strategy banks' resources. We use the reports hidden in your QuickBooks to diagnose and understand your construction business and develop plans. To help you implement a path to success for you and you alone because every contractor has unique Strengths, Weaknesses, Opportunities, and Threats (S.W.O.T. Analysis) that can lead to a Strategic Roadmap which cannot help but make much money.

About The Author:

Sharie DeHart, QPA is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on how to manage the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com