Month: July 2014

How to Get Paid on an Overdue Bill

A reality of doing business is that, at some point, you’ll have a customer who can’t or won’t pay their bill. Which approach is best depends on the situation, the customer and your overall goals.

A contractor’s first and best option is a construction (mechanic’s) lien. The best way to protect yourself is to make sure you follow your state’s requirements, including advanced notice to the customer, to ensure you can file one. If you cannot get a construction lien for some reason, there are generally five other options available.

 

1. Send a collections letter: A collections letter is sent by you or your attorney to the customer and details the services provided, specifies the amount due and the consequences of non-payment. It is usually the first option to use when an account becomes overdue. In some cases, a collections letter is enough to prompt the customer to pay or to start negotiating a payment plan. However, some customers will simply ignore them. The best collections letters are more than empty threats–you have to follow through on the consequences.

2. Negotiate: The chances of collecting the full overdue amount are reduced the minute the account becomes overdue. For that reason, it might be cost-effective to negotiate a deal to accept less than the full amount. This is a particularly good option if the customer is truly unable to pay the full amount or you’d like to keep their business.

3. Use a collections agency: A collections agency is a third party that will attempt to collect the debt for you. Some agencies will buy the debt from you for a percentage, while others charge a flat fee. While using a collections agency frees you up to concentrate on your business, the costs can often be high. Make sure to do your homework and find a reputable agency.

4. File a lawsuit: Collections lawsuits are often a last resort. If you’re lucky, filing a lawsuit can scare the customer into paying. On the other hand, lawsuits (even in small claims court) can be time-consuming and expensive. They can be especially frustrating if you win your case only to find out that the customer is “judgment proof” (i.e., has so little that he or she is protected from having to pay) or files bankruptcy. Lawsuits are most effective against debtors who have the ability to pay you, but won’t. And remember: if you hope to continue a relationship with your customer, a lawsuit will probably put an end to that.

5. Write off: Ultimately, there will be some debts you simply can’t collect, either because you decide it’s not worth it or because other options fail. In that case, you should write off the debt on your books and chalk it up to a learning experience.

When choosing an option, you’ll need to weigh the amount of time and effort it would take to pursue a debt and the chances of success. There are also “big picture” issues to consider: for example, you could sue every customer the day after their account become overdue, but that probably won’t help your business reputation.

Understanding your options in the event a customer doesn’t pay can help you deal with the situation efficiently so you can get back to running your business. There’s no way to guarantee you’ll get paid, but you can reduce the chances of overdue accounts and increase your chance of collecting debts if you take a proactive approach.

Regardless of which option you choose, make sure you document all of your interactions with the customer: contracts, change orders, invoices, e-mails, phone calls, and payment arrangements should all be written down. Given the nature of home improvement, it can also be a good idea to include pictures of the work you’ve done as it progresses, including “before and after” photos.

Ultimately, the most effective tool to prevent overdue accounts in the first place starts at the beginning of the relationship, with solid terms and conditions and detailed, written contracts that let everyone know what to expect. It continues with timely invoicing and consistent follow up on overdue balances. And all of the options above work best when they’re part of the system. A good business or real estate attorney can help start you in the right direction

Contracts: An Underused Contractor’s Tool

Before you begin work for a customer, it’s crucial to have a contract in place. A contract protects you and your customer by setting out, ahead of time, the expectations you both have. While some parts of your contracts will change depending on the type of work, the size of the project, or your business preferences, there are some basic parts that should always be in your home improvement contracts.

First, you should always have a written contract with your customers. Many states actually require home improvement contracts to be in writing if certain criteria are met. For example, Wisconsin’s Home Improvement Practices Act (Wis. Adm. Code ATCP 110) requires contractors who accept payment before the job is completed to have a written contract that contains certain key parts. Regardless of whether it is required, a written contract can reduce the chance of a dispute (for example, over what work was included) later on and also serve as evidence to support your claim if a dispute does crop up.

 

So, what should be in your written contract? Many states have specific legal requirements and limitations for home improvement contracts. You should consult a local attorney to make sure you comply with your state’s laws. Generally, however, there are seven things all home improvement contracts should have:

1. Price: The contract should include the total price, plus any finance charges (particularly if you allow payment plans). If the project is for time and materials, specify the cost of materials, the hourly rates involved, and any conditions that might affect those prices.

2. Work description: A good work description lists not only what you will do, but what materials you will use. More detail is better. For example, if you install windows, identify how many windows you’ll be installing, who manufactures them, their make/model, their color and size, and so on. The work description is also a good place to note if something isn’t included. Using the same window example, you might want to note that you do not install shutters on the new windows.

3. Time period: Identify the start date and completion date. If you don’t know specific dates, include the time period during which the work will take place. It’s also a good idea to note if there are factors (i.e., weather) that could alter the schedule and how that will be handled.

4. Contact information: Your written contract should include your name, address and phone number. If you want customers to contact you by email, include that as well. You should also include the name and business address of the salesperson or agent who worked with the customer.

5. Security interests/construction lien rights: If you plan to take out a lien, mortgage or other security interest (usually as part of financing), then you should make sure it’s clearly stated in the contract. Additionally, some states require certain notices be given to homeowners about contractors’ and subcontractors’ construction lien rights. A local attorney specializing in construction law can set you on the right path.

6. Guarantees and warranties: If you make any guarantees or warranties about your products and/or services, they should go in the contract, along with any conditions or, just as importantly, limitations on them. In some cases, you may also want to note or include any guarantees or warranties made by manufacturers of the products used.

7. Signatures: Ideally, you want a contract signed by both you and the customer. Ultimately, the most important part is to have the homeowner sign, as that is the party against whom you could potentially end up enforcing the contract in court.

We highly recommend that you work with a local attorney to customize your basic terms and conditions in the contract for your business.

Even with all of the advantages of having a written contract, many contractors resist them because they know that a project often changes as it goes along. The good news is that there’s a simple way to address this issue: change work orders are additional written and signed documents that can be incorporated into your contract if changes need to be made. Together, they can help you stay on the same page with your customers and protect you from disputes down the road.