Understand Construction Customers That Don't Pay - How to Deal With It
- Cost Construction Accounting
- Apr 24, 2023
- 6 min read
Updated: Nov 13
Are you tired of chasing down payments and dealing with the headache of late or non-payments in your construction business? You are not alone. It is a common issue that many business owners face, and it can significantly impact your cash flow, not to mention your stress levels.
In this comprehensive guide, we'll explore the most common reasons why customers in the construction industry refuse to pay. More importantly, we'll show you how to get paid on time with proven strategies and the help of a reliable bookkeeping service firm like CCA. Don't let late payments cost you time, money, and valuable resources. Keep reading to learn how you can avoid these issues and keep your business thriving.
Understand Customers That Don’t Pay
The best way to deal with customers that don't pay is to make sure they won’t do it in the first place. To do that, you need to know why clients refuse to pay contractors on time.
1. Billing Surprises:
No one likes surprises, especially when it comes to paying bills. If your customers get invoices that are not what they expected or are not clear, it can cause confusion and slow down payment.
The solution? Establish transparent and professional communication with your clients. By documenting all communication in writing such as via email, you can avoid misunderstandings and refer back to evidence if needed. Consider implementing these best practices:
Send detailed estimates before starting work
Provide regular project updates with cost breakdowns
Use progress billing to keep clients informed throughout the project
Confirm all verbal agreements in writing within 24 hours
2. Incorrect Invoicing:
Numerous factors, such as inconsistent formatting and unclear line items and categories, can contribute to inaccurate invoicing. No matter what the reason is, it can make your customers confused and unhappy, which can delay payment or even make them refuse to pay.
To avoid this scenario, ensure your invoices are always professional, accurate, and easy to understand. This means:
Using consistent, professional invoice templates
Breaking down costs by phase or category
Including specific descriptions for labor and materials
Keeping clients updated on any changes to scope or cost in real-time
Referencing purchase orders or contract numbers
Clearly stating payment terms and due dates
3. Change Order Disputes:
Changes are an inevitable part of the construction industry, and they frequently lead to disputes over completion or change orders. According to industry data, change orders account for nearly 40% of payment disputes in construction.
To avoid such scenarios, it is crucial to get your client's written approval for any changes in costs and timeline, no matter how insignificant they may seem. Failure to do so can result in unpaid work, which can significantly strain your business's finances.
4. The Customers Just Won't Pay
Non-payment is every business owner's worst nightmare. Whether it's because of a lack of funds or slow-paying customers, it can seriously affect your cash flow. In such situations, you might have to consider taking a lien on your customer's property to ensure that you get paid.
However, it's always better to do your due diligence before starting work and ensure that your customer has good credit. Even financially stable clients can run into trouble later on, so it's better to be safe than sorry.
How Much Does A Non Paying Customer Cost You?
Chasing down payments and dealing with financial losses can be frustrating and time-consuming. But if you ignore the issue, the consequences of bad debt can be even more harmful to your business. A non paying customer has a huge impact on your bottom line. Even a small bad debt can greatly affect your profit margin.
Let's look at the real numbers:
According to CFMA (Construction Financial Management Association) data, the industry average profit margin for specialty contractors is just 6.2%. Let's do the math:
If you have a 6% profit margin and lose $25,000 to bad debt, you would need to generate $417,000 in new revenue just to break even on that loss.
That's not revenue that grows your business, it's revenue just to cover what you should have already been paid.
Ignoring the issue won't make it go away. In fact, it could cause even more financial harm in the long run. That's why it's crucial to understand the true cost of a non-paying customer and take action to prevent and address the issue.
With the help of a reliable bookkeeping service firm like CCA, you can stay on top of your finances and avoid the headaches and losses associated with non-payment.
How to Prevent Late Payments: Proactive Strategies
Now you know it is important to get paid on time. If you are concerned about what to do when a customer does not pay, then here are 3 simple things you can do to speed up the payment process and avoid non-paying customers:
Send friendly payment reminders to your customers, and ensure they remember the date the payment is due.
Make it easy for them to pay through many payment options like a credit card, ACH transfer, checks by phone, and payments like PayPal.
Be serious with customers who take too long to pay their invoices. It's important to put an end to this behavior to avoid future payment issues.
Remember, it's your business, and you deserve to be paid fairly and on time for your services.
Electronic Payments Continue to Rise
According to the Construction Financial Management Association (CFMA), more construction companies are moving toward electronic payments every year. Electronic fund transfers, known as Automated Clearing House (ACH) payments, and card payments have become the preferred methods, especially among larger companies with annual revenues exceeding $500 million.
Benefits of electronic payments for construction businesses:
Faster and more secure payments: Money arrives in 1-3 business days instead of waiting for checks to arrive and clear
Reduced processing costs: No bank trips, no check printing costs, no lost or stolen checks
Improved cash flow management: Automatic deposits make it easier to predict and manage cash flow
Enhanced efficiency and productivity: Less administrative time spent on payment processing
Better control over financial data: Digital records are easier to track, organize, and reconcile
Reduced errors: Eliminates issues with illegible checks or incorrect manual entry
Setting up electronic payments is easier than ever. Most accounting software and payment platforms now offer integrated solutions specifically designed for construction businesses.
How Construction Cost Accounting Can Help
As a construction business owner, you know the hustle and bustle of the industry all too well. Managing projects, crews, suppliers, and clients is a full-time job and then some. Keeping track of accounts receivable on top of everything else can feel overwhelming.
That's where CCA's accounts receivable management services come in to simplify your life and unleash the true potential of your business.
Our expert bookkeepers are focused on the construction industry's ins and outs, so you can focus on your specialty. Here's how we can help:
Document Accurately: You can count on us to accurately record and categorize all of your data, providing you with a reliable customer history and reference. No more messy paperwork or missed payments!
Invoice Timely: We make sure your clients know when payments are due and the exact amounts to be paid, along with any related terms. No more confusion or misunderstandings!
Follow up Consistently: If your clients don’t pay invoices on time, don't worry; we'll take care of it. Our friendly and professional follow-up process ensures that you get paid quickly and efficiently without damaging your customer relationships.
But wait, there's more! Our advanced AR automation processes eliminate flaws caused by manual work, streamlining your invoice processing and ensuring fast payments
Take Control of Your Cash Flow Today
Late or non-payments from construction customers might hurt your firm. Knowing customers that don’t pay is essential to preventing this issue. You also know how to collect money from clients who won’t pay. Three simple actions can be taken, like sending friendly payment reminders, giving multiple payment choices, and addressing special cases with care.
CCA's Accounts Receivable services are the best way to streamline your accounts receivable process and cut down on late payments. With our advanced automation processes and commitment to accuracy and professionalism, we can handle the finances while you focus on growing your business. Don't let late payments stop you from moving forward.
Schedule a free 30-minute consultation to discover how CCA can transform your accounts receivable process and give you the peace of mind that comes with predictable, reliable cash flow.
Comments