Collections is a challenge for any business, but the construction industry is subject to a set of complex arrangements that result in unique challenges. Construction businesses need to use every credit and collection tool at their disposal to ensure timely payments and protection of their rights in the event payment is not forthcoming. With multiple levels of payments in the chain, different contract terms in each of those steps, and many companies involved, payment can quickly spiral out of control for everyone on a project if one company begins to have issues.
Joint Check Agreements
These agreements require that checks are made payable to multiple parties and require the signature of each party to be deposited. The subcontractor can then ensure they receive their portion of the payment in exchange for their signature. Suppliers and subcontractors should pay close attention to payment provisions that remove obligation from the general contractor to pay if they do not receive payment.
Credit Agreement
An agreement between two parties, one, such as a subcontractor, to provide the work on credit while the other, such as the prime contractor, to provide some security to ensure payment on the work. This would be a case where the contractor had some assets set aside or purchased a bond that would provide surety of payment in the event the contractor fell through. The subcontractor then extends credit in the form of providing labor or supplies for the project before payment is due.
Bonds
A third party holds the contractor responsible for the completion of the project and the owner for paying what is due. If the project is completed as promised, the bond company will come through and pay any amounts owed.
Retainage
Holding back a portion of payments due until the project is substantially complete can be a negative for subcontractor’s cash flows. While it motivates completion, it doesn’t always facilitate good will. Instead, consider holding retainage funds in a trust account where the interest is, at least, benefiting the contractor.
Lien Waivers
These are exchanged to ensure both payment is forthcoming and, once payment happens, that the receiving party will not file a lien against the project. There are a number of types of lien waivers that can be used, all of which are designed to protect the interests of both sides in a project.
Different companies on a project will often employ different credit and collection tools to ensure they are paid what is owed. Many problems can be avoided by clear and regular communication as to project scope, payment expectations, and a clear set of business procedures to follow on a set timeline regarding contracting, invoicing, and late payments.
This can start when you negotiate the contracts presented to you by the owner or general contractor to ensure you’re getting terms your business can work with. Construction counsel such as the team at National Lien & Bond has helped businesses negotiate deals that both ensure prompt payment and protect the interests of those throughout the construction chain. With experienced assistance on your side, you’ll be able to use the different credit and collection tools available for your benefit.
