By: Dean Kaplan, CEO and President, The Kaplan Group
Like many seasonal businesses, construction companies often have trouble keeping their cash flow steady. The highs are great, but the lows have the capacity to ruin your business. Sometimes even the highs can be hard on your business, if you find yourself in a situation where you have more work than you can reasonably do. Unfortunately, many cash flow problems come not from the seasonal nature of construction work but from unpaid invoices. As a collection agent, I’ve worked with many construction companies and while every case is different, there are certain steps you can take to protect yourself from invoices on which you can’t collect.
The single most important thing you can do for your cash flow is to properly lien a project. Sadly, we have handled claims where our client did not lien the project properly and their customer knew it. If you do not have an enforceable lien, your bill will drop in priority to any other vendor who does have an enforceable lien.
Lien laws are different in every state, but they all have deadlines. People are often reluctant to spend money on litigation, but if you do not act within the deadlines you could lose your lien rights. Often, the deadlines are very short. Many collection agencies have attorneys who will work on a contingency basis. This makes filing the litigation within the time frame more viable from a cost perspective. But don’t wait until the last minute as it does take some time for a collection agency to understand the situation and get an attorney to take action.
Checking the reputation and credit worthiness of a new client is something we routinely advise. In construction, you should also look at the reputation of the builder or developer. Let\’s say you are a paint vendor and you work with Big Painting Company all the time. You’re happy when Big Painting Company brings you into a new, large job. However, if you looked at it, you might find out that the general contractor the painting company is working for has a reputation for slow payments and negotiating discounts whether those discounts are fair or not. If your customer ends up having to accept a discount because their customer is squeezing them, that pain may roll downhill to you.
The other vendors on the job matter as well. We recently handled a case involving custom home construction. The homeowner was unhappy with the custom windows and demanded a discount from the contractor. The contractor had already paid the window company and so then became short on money to pay his own expenses, including other vendors such as our client. Our client ended up having to give a discount because of someone else\’s poor workmanship and the contractor’s poor financial management of the job.
You should also try to understand the financing on the project, especially if the size is one that makes your company financially vulnerable. We currently have a customer who is owed $100,000 on a $40 million project. The developer is not going to pay anybody until they restructure the financing. Anybody who doesn’t want to wait and sues right now will get a judgment, but the project is upside down financially and all the assets are secured, so there is no way to collect on a judgment.
We were able to get $10,000 out of the developer in exchange for agreeing to not file a lawsuit for 60 days. For the developer, it was worth it to pay us something and avoid the extra cost of a lawsuit because they are confident that they will get their financing done within that 60 days.
No one loves paperwork, but not having a good system could cost you money. In addition to any contracts, signed orders and invoices, you’ll want to keep signed delivery receipts if you are providing materials. If you are a service provider, every job ticket needs to be signed and your invoices should have this itemization. You also need to make sure you send your invoices to the right people in a timely manner.
Too often companies have sloppy bookkeeping practices that prevent them from invoicing and following up on invoices. This is especially true of construction companies that don’t feel like they can afford a year-round bookkeeper. Fortunately, there are many inexpensive bookkeeping systems that you can run yourself. In addition to invoicing and following up on invoices, you should make it as easy as possible for your customers to pay you. Some clients prefer to pay by check, some by credit card, others online. The easier it is for your client to pay you, the more likely they are to pay you. The longer an invoice goes without being paid, the less likely it is to be paid. If invoices are more than 90 days overdue you should consider hiring a collection agency to pursue the debt.
When to Stop Work
It’s a hard decision to make, but sometimes if you are not being paid you need to stop work. It\’s a delicate balance, because we all know the impact on the business if you have to keep people off the job site and let equipment sit idle. However, if your client doesn’t have the ability to pay today and there\’s no reason to think they\’ll have the ability to pay in two weeks or a month, then continuing to work just makes your own financial situation more precarious.
Construction can be a volatile business with a lot of factors that are outside of your control. Keeping your cash flow as steady as possible can help you withstand the highs and lows.
Dean Kaplan is president of The Kaplan Group, a commercial collection agency specializing in large claims and international transactions. He has 35 years of manufacturing, international business leadership and customer service experience. Today, he provides business planning, training and consultation to a variety of global companies.