Capital Preservation During This COVID Downturn
Getting Paid on Time
Late Payments Are Every Contractor’s Nightmare
Last week we began a discussion on the importance of your firm’s capital position as this latest COVID-caused market downturn unfolds. When you ask your CFO, or your accounting manager how much capital you have available they will include accounts receivable in their calculation. It’s work you’ve already completed and billed for and money you are owed, so it’s part of your working capital. But during extended down markets this metric requires more careful scrutiny because builders seldom get paid for their work when due or the exact amount. The harsh reality is that contractors seem to be at the bottom of the payment pile. Late payments and unpaid invoices are huge headaches for numerous construction businesses and for contractors in most parts of the world. Late payments disrupt cash-flow and result in contractors being unable to pay their suppliers, subcontractors on time and, worst case, employees.
Bad business practices are usually caused by long-held bad beliefs.
I have asked three questions in the past and here I ask again:
- “How did we let owners begin to think it was up to them when to pay us and whether to pay us at all?
- Why did we allow one-sided interpretations of contracts to become the norm?
- When did we accept that we have contracts that spell out in detail stringent performance specifications for contractors but leave payment up to the judgement of the owners and their designers?”
These practices describe the payment environment in most of the industry and demonstrate, for me at least, a problem with our beliefs about entitlement. These practices put contractors in the passive role of taking what they can get rather than the active role of invoicing their customers for services rendered. The very word “requisition” suggests that we can only ask for our money. In other words, some contractors do not feel that they are entitled to be paid on time and because they don’t believe they will be paid on time, no one else in the industry cares about it.
Bad Business Practices
- Cash flow is always a concern, but when all of a contractor’s reserves are tied up in old retainages and slow payments they can be forced out of business. Even if they survive , the interest paid on lines of credit required because of over-held retainage can leave them in a precarious position going forward.
- This can result in the loss of payment discounts (so items cost more) and stricter payment terms with suppliers in the future, which could mean that suppliers require earlier payment, or even payment in advance. This negatively impacts a contractor’s cash-flow further.
- Non-payment of suppliers or subcontractors disrupts work on construction projects resulting in delays, and it creates mistrust between the parties impacted. Nobody wants to have to wait for their money. Late payments and non-payment may be the biggest cause of construction contractors going bankrupt.
According to most contracts, the payment requisition is to be filled out by the contractor, approved by the designer, and retainage withheld. The belief involved is that the contractor probably won’t do his job unless he is forced to. Owners deny this. The authors of the contracts deny it. But no one wants to give up the practice. Its very usage sets the tone for the relationship between owners and contractors.
- You have provided a valuable service and are entitled to be paid on time and in full.
- You do not have to request payment. Your client has to adhere to the legally binding contract they signed with you and pay you according to its terms.
Better Business Practices
If the new realities above become imbedded in your belief system, you will adhere to the following better business practices:
- You have a right to be paid. Make sure contracts you enter into make payment terms clear and insist that contract terms be honored. Do not “ask” or “beg” for payment. Payment is not a backroom discussion. Explain that your efficiency and productivity depend on paying your subs and suppliers on time and that you don’t want to invest in the project—just build it. They should know that—they shouldn’t need to be told, but they do.
- Include a late payment fee in your contracts if at all possible.
- Be sure you submit properly documented invoices in a timely basis. Late or sloppy paperwork delays payment.
- Communicate with clients about payment before payment is due as a reminder and communicate constantly until payment is rendered.
- Provide good service. Don’t give a client an excuse not to pay you.
- Communicate in writing. Phone calls do not stand up in court.
- Don’t be afraid to argue or demand if necessary.
- Don’t work for clients with bad reputations for payment.
- Have your accounting department keep you apprised weekly of payment status from all clients.
No one in the industry is working on this issue. If contractors unite, we will win this debate because we are only asking for what our contract already gives us.