415: Proven Construction Client Payment Practices That Work

This Podcast Is Episode Number 415, And It's About Proven Practices To Collect Construction Client Payments Effectively

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.

We'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.

Knowing The Answers Helps

"If you know the answers, the questions will not bother you" - Randalism.

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; you need the answers to develop understanding, which helps us all let go of the past and move forward.

The larger your construction business grows, the more likely you could end up operating as a bank without the hundreds of ways to generate revenues from fee income and interest calculation that banks use. The most popular method designed by investors and developers and shrewd business people who understand the concept of divide and conquer is for contractors to get little or no down payment for a construction project, do all the work, including change orders, and then try to collect their money.

The least popular method is getting work orders, contracts signed, and deposit checks before starting the project because most of us were conditioned from childhood through adulthood and beyond not to ask for money. Some construction company owners are gung-ho about doing the work and yet are embarrassed about asking for money.

Here are the best construction client payment practices that worked for our company and clients:

1.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 bad, 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.

2. Offer payment options.

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 offer to finance by getting a merchant account setup at a bank or credit union that will contribute 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.

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.

3.The right mindset.

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. 

Final thoughts

Having owned and operated several construction businesses, we know how vital cash flow is to any business's success or failure, especially construction companies like yours!   The right mindset and method will help you avoid client payment problems. 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, we say that with respect and admiration for everyone in construction.

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