More construction businesses fail from the lack of cash due to poor cash management than from “bad” jobs—it’s a fact. One of the main causes of poor cash management is the ineffective collection of receivables.
Your ability to survive—and even grow—in this industry demands that you get paid in a timely manner. Timely means getting paid as agreed to in contract documents.
Historically, the construction industry ranks among the worst in terms of completing the work-invoice-payment cycle. The further you are down the payment chain, the more likely you are to be the subject of payment float (i.e., the last one to be paid).
Are there laws against this? Sure. There are federal and state “Prompt Payment Act” laws, and their legal equivalents. Is slow pay or floating money a breach of contract or possibly illegal? You bet. Call Perry Mason.
While you are waiting for Perry or his legal aids to show up, consider implementing some proactive routine practices to ensure your business avoids the obvious implications of running out of cash.
- Collect receivables: The collection of receivables is a critical business management function. A weekly review of receivables, their due dates and their aging is an absolutely necessary function of a management team. That’s you! If a customer owes you money and is past due, contact them daily until it is collected. Do not be shy about going directly to the front desk of the customer’s office and asking to be paid or making a fuss with the project owner. The squeaky wheel most often is the one that gets the grease.
- Avoid Paid-if-Paid clauses: NEVER sign a contract containing a “paid if paid” or “paid when paid” clause. These types of clauses are usually illegal, and even if they are not, don’t sign them even if pressured to do so. Also, unless it absolutely cannot be avoided, do not stop work to leverage payment. Get legal help before you try this tactic because it can backfire for all sorts of reasons.
- Implement a disciplined management regimen: Schedule a regular time to review the status of accounts and particularly overdue receivables.
At Direct Surety, we work with construction contractors of all sizes, specialties, geographic locations and market segments. Along with providing more surety credit at a better price, we also provide tools that reveal best practices used by all of the top construction companies. Proper collection of receivables is only one of over 75 practices that you can put in place to maximize your profit-making ability and minimize your risk of failure. Partner with us to learn more about how Direct Surety can empower you to grow and prosper!