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Getting Paid—On Time, Without Drama

THURSDAY, JANUARY 16, 2014

By FMI


More items for Good Technical Practice

Any principal of a construction firm will tell you that cash is king. There is little room for error when it comes to feeding the cash cycle.

Why not apply the same focus and fervor to collecting the monies owed to your company that you do to installing the building components for which you bill?

Confrontation
© iStock / lisa-blue

Cultivating better relationships with clients can pay off—literally.

Here's how.

Manage the Process

Often, too much of the responsibility for collecting receivables is shifted to the accounting department.

When accounting investigates the nature of an account and the reason for delinquency, it is often determined that the client has withheld payment because it has yet to receive consideration for payment as outlined in the contract.

Examples range from a significant deviation from the schedule of values to failing to deliver as-built drawings.

Once accounting has determined the root of the problem, the information must be relayed to project management. The project manager then has to spend a day or two digging through the jobsite trailer, chasing down architects and drafting another proper payment application.

By the time the project manager is prepared to submit the revised payment application, another billing cycle has passed and the project is out another 30 days on cash collection.

Avoid Redundancy

Project managers should control and manage the receivables process. They can keep better tabs on the nature of outstanding receivables and take the necessary actions to get the client to release payment.

Project managers can use dashboards to create visual representations that readily identify the dollar value of outstanding receivables and the number of days outstanding.

Project manager
© iStock / korayhoylu

Project managers can keep better tabs than your accounting department on outstanding receivables and take the necessary actions to get paid.

If the issue is identifiable, it is actionable—and the project manager can be proactive about collecting.

Being Proactive

Best-in-class project managers will set up a meeting with their counterpart in the client’s organization to discuss the billing process and outline expectations before the start of the job.

Some will even flowchart the journey of a payment application through the client’s organization. This helps both parties identify the reason(s) behind payment issues, when they do occur.

Creating zippered relationships has tremendous value in collecting accounts receivable. Whenever you “go over someone’s head” to collect payment, existing relationships become strained.

However, if your organization’s executive leadership has established a rapport with the client’s leadership, payment disputes can generally be resolved amicably.

The Value of Relationships

Make sure that the accounting staffs of each party are on the same wavelength as well. Getting feedback from a client on nonpayment is much easier with a familiar voice on the other end of the line.

However, relationships will not materialize on their own. It should be up to the project manager to facilitate introductions and bring the two organizations together.

From a construction standpoint, projects that start well generally finish well. The same can be said for the billing process on a given job.

Starting Off Right

The first billing cycle is a project manager’s greatest opportunity to establish expectations with a client. Having your ducks in a row and billing properly from the onset will improve your ability to maneuver turbulent waters downstream.

Table on jobsite
© iStock / stocknroll

From a construction standpoint, projects that start well generally finish well. The same is often true for the billing process.

In the beginning of the project, there are typically no extraneous items that would impede payment. If the paperwork checks out and the payment application is delivered on time, you should expect payment in a timely fashion.

Take note of how quickly the first payment application is processed and released. Use that period as a benchmark for subsequent billings.

If receipt of payment deviates significantly from this unofficial schedule, that should raise a red flag for your project manager.

While a plethora of issues can delay payment, the important thing is to realize as early as possible that there is an issue. This allows project managers to be as proactive as possible in resolving it.

Conversely, if the first payment is delayed unreasonably, then take immediate action to secure payment. It is a matter of training the customer as to what you will and will not accept. As a first offense, pressing for payment should be done with grace.

Customer Service

Proper billing may not be the first thing that comes to mind when you think customer service, but it can have a huge effect on the client relationship if it is mismanaged.

Front-end loading a schedule of values and overbilling are common practices in the construction industry. However, extreme behavior in this arena can cause a client to halt release of payment.

“Getting your hand caught in the cookie jar” can severely damage the client relationship from the onset of a project. Once trust has been eroded, it can be a long, uphill climb to regain it.

Collecting Retention

At 5% to 10% percent of contract value, retention often equals or exceeds the net margins being realized in today’s construction markets.

That said, it is extremely important to collect on retention as early as possible. One of the most common issues in collecting retention is failing to deliver a completed project.

Painter
© iStock / lawcain  

Assume the responsibility for delivering a finished product. Develop an internal pre-punch list to head off unfinished items your client will flag.

The onerous task of compiling a punch list should not rest squarely on the shoulders of the client.

As a retail consumer in your everyday life, you would not accept a transaction that included the caveat of a punch list attached to the “finished” project. Why should you expect your customers to accept this?

Start by generating an internal pre-punch list. Collaborate with all members of the project team to devise an exit strategy and coordinate with other trades to execute the strategy.

Setting a goal to achieve zero punch list items will help drive your exit strategy across the finish line. Monetizing the punch list can help both parties accelerate their performance and payment on major items.

Avoid being pennywise and pound-foolish in the closeout process. Getting off the project in a timely fashion is paramount.

Ignoring potential liquidated damages, the cost of extending project overhead, and multiple mobilizations can cripple the margins of an otherwise well-executed project. Ultimately, delivering a truly complete product will do wonders for your ability to collect retention.

Deflecting Delinquency

Before beginning a project, or even signing a contract, your company should have a process for determining the creditworthiness of a client.

There are many methods and sources for researching a client’s credit history, some more discreet than others. Consider:

  • Dun & Bradstreet
  • Credit bureau
  • Banks
  • National Association of Credit Managers
  • Other contractors
  • Other customers
  • Suppliers
  • Financial statements
  • Company brochures
  • Project funding agreement
  • Clerk of the court

Having this information upfront should give you a clear indication of the payment risks involved in a project.

Monitor your clients’ credit risk throughout the life of their contracts, and know their financial standing at all times. You should always have contingency plans, but some at-risk clients may deserve more attention than others.

At the point where you have earned full right of payment and an account is still delinquent, ownership of the collection process can be transferred to accounting.

Know your available remedies and safeguards within the confines of the contract, and have specific plans for legal action if necessary.

Contractors, subcontractors and clients often work together on multiple projects simultaneously. A payment concern on one project can quickly become a systemic risk for a large portion of your backlog. If issues arise on one project, make sure they are communicated to areas of your organization that may have similar exposure.

Managing receivables is not unlike managing physical construction. Simple actions can be taken at the onset of a job to improve the flow and conversion of receivables:

  • Know your clients inside and out.
  • Establish a rapport that sets precedent for the remainder of the project.
  • Have a plan for managing outstanding and delinquent accounts.
  • Be aware of risks and communicate them clearly to all parties involved.

It is hard enough to earn a dollar in today’s construction markets. The process of collecting that dollar should not be the bane of your existence.

R. Tyler Pare

"Getting Paid" was written by R. Tyler Pare, a consultant with FMI. He focuses on leveraging his construction experience, coupled with his advanced knowledge of business mechanics, to help clients mitigate risks and improve productivity. Contact Tyler.

 

ABOUT THE BLOGGER

FMI

“Building Success” is written by professionals at FMI, the world’s largest provider of management consulting, investment banking, and research for the engineering and construction industry. FMI serves contractors, building materials and equipment producers,architects and engineers,owners and developers,and others across the industry. Author information is available at the bottom of each blog entry.

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Tagged categories: Business matters; Construction; Consultants; Contractors; Contracts; FMI

Comment from john lienert, (1/20/2014, 9:02 AM)

thanks, tyler.....you "hit the nail on the head "....i will pass this knowledgeable article on to some of my companies' job supers on our current projects.........maybe i'll get paid faster....john and crew


Comment from Tyler Pare, (1/20/2014, 7:35 PM)

John, I'm glad you found the article useful. Please, don't hesitate to reach out if you would like to discuss this topic further (tpare@fminet.com)- Thanks, John!


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