Reducing Potential Payment
Problems
Getting paid on time and for all labor and materials is critical to good
cash flow. After all, receivables aren’t much use until they are collected
and turned into cash. However, as all contractors know, sometimes that’s
much easier said than done.
In addition to standard payment delays, contractors face other payment
problems that are unique to the construction industry--payments related to
change orders, for example. Contractors can use a variety of strategies to
reduce late or disputed payments and ensure that sufficient cash is
available to keep the business operating without interruption.
Laying the Groundwork
A basic, but often overlooked, first step in reducing payment problems is
the credit check. If you’re interested in a certain project, checking out
the developer’s or owner’s credit history before you submit a bid or sign
any contracts helps minimize potential payment problems.
Your payment terms should be clearly spelled out on all of your proposals
and contracts. You want your customers to be aware of the due date for
payment before they sign on the dotted line.
If everything seems to be in order and you’ve accepted a job, you can
increase your chances of being paid on time if you bill regularly. Send
bills out for work and materials as you complete each stage of the project.
Be sure each bill clearly explains what stage of the work was completed. In
addition, make sure you stay on top of bills. Send friendly but firm
reminder letters when customers fail to pay on time. If you still don’t receive payment, you may have to threaten to stop work on
the project until you’re paid.
Put Systems in Place
Your ability to get paid in full for extra and changed work can make the
difference between a profit and a loss on a given job. You’ll increase the
likelihood of getting paid in full for extra work if the terms and
conditions are clearly spelled out in your contract.
Unfortunately, disputes will arise with owners even when you think you have
covered everything in the contract. Contractors are sometimes asked by
owners to absorb the cost of extras and additions. That’s why it’s critical
that you make your on-site supervisors aware of what is and what is not
included in the contract. If your customer wants to make changes in the
middle of a project, your supervisors should follow a series of
pre-established steps to first get the changes approved and then make sure
the changes will be billed.
Have a Project-Cost Accounting System
Establishing a single-cost accounting system, as well as clear guidelines
for implementing the system, can help eliminate disputes about extra
charges. Bear in mind, however, that the system should not be so complex
that the project management team can’t make effective use of it, yet it
should be sophisticated enough that it tracks all additional work costs.
Use Punch Lists
Walking the owner through a nearly completed job with a punch list gives
both of you an opportunity to identify problems and decide how best to
handle them. Taking this approach makes it more likely that the owner will
agree that the job is substantially completed and release the balance of the
contract price.
Work-In-Process is provided
by Somerset for our clients and other interested persons upon request.
Since technical information is presented in generalized fashion, no
final conclusion on these topics should be made without further review.
For additional information on the issues discussed, please contact
Ken
Hedlund or another member of our
Construction & A/E Team.
This document is not intended or written to be used, and cannot be used,
for the purpose of avoiding tax penalties that may be imposed on the
taxpayer.
Somerset CPAs, P.C.
3925 River Crossing Parkway, Third Floor
Indianapolis, Indiana 46240
317.472.2200 • 800.469.7206 • FAX 317.208.1200
www.somersetcpas.com
