How do you address a customer not paying for building work

Lien Waivers, Conflict Resolution, Construction Law
Joey Randazzo
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Articles
Published: 
October 26, 2021
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Table of Contents

Like with all clientele-based services, the construction business isn’t without its customer headaches.

Whether you’ve been in the industry five years or a twenty-five years, chances are you’ve run into an unpleasant customer or two.

But the difference between a picky customer and a customer not paying for building work is a big one.

What should you do when faced with a client who won’t pay?

Or more importantly, what shouldn’t you do?

Our guide will outline:

  1. Your rights as a contractor
  2. Legal recourse you can take; and
  3. How you prevent future non-payment for your work.

Flexbase: Your Non-Payment Resolution Advocate in the Construction Industry

Flexbase will be your voice when you’re faced with a client who refuses to pay. Contractor rights and legal recourse are among our capabilities. Well within our capabilities.

On top of automating the payment process, you’ll have access to our payment reminder process which escalates from auto-reminders all the way to lien filings, all for free.

And at Flexbase, we don’t get paid unless you get paid.

We’re here to meet your payment automation needs — from AIA billing forms to insurance forms and everything in between.

With Flexbase, you can:

  • Streamline all of the paperwork required on a project
  • Prequalify for working capital by our preferred lenders; and
  • Get paid sooner.

Since the average small construction company files between 3-6 liens per year, Flexbase’s payment reminder process and legal notices can save you both time and your sanity.

3 Common Reasons a Customer Won’t Pay for Building Work

It’s frustrating when your client doesn’t hold up their end of the contract. You’ve put in the work but they’re denying you what you’re owed.

How do you react?

In order to determine the best professional response, you’ll first need to figure out why the customer won’t pay for building work.

#1: Customer Believes the Contractor Did Something Wrong

If a homeowner or property owner feels that…

  1. Your didn’t deliver the type of work that was agreed upon
  2. You finished the project later than you said you would
  3. You used inferior materials; or
  4. Your work was somehow inadequate

…there’s a high chance they’ll withhold payment.

If this is the case, the best way to respond would be to visit the home or property yourself and take a look at the situation.

A Professional Response to Non-Payment When the Customer Believes the Contractor is at Fault

If the problem or error was, in fact, your fault, first see what it would take to fix the problem.

If the issue may take a lot of resources or add a significant amount of time to the project, you could offer to compensate by doing some additional work around the house or property.

Your client will see your good faith effort to correct the situation.

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#2: Customer Wants a ‘Better Deal’

Unfortunately, sometimes clients can be just plain sneaky.

If you find yourself faced with a dishonest customer, you may need to consider whether you can afford to be paid less than 100% of the price agreed upon in your project contract.

Maybe your hands are tied and your company needs that promised cash flow.

A Professional Response to a Delayed Payment for Construction Work When the Customer Wants to Pay Less

You’ll want to weigh out the exact details of the situation.

A client refusing to pay $4,000 of a $100,000 job is a lot different than a client refusing to pay $25,000.

In the end, it may be the easier (and cheaper) route for your company to eat the $4,000 compared to the costs associated with hiring a lawyer and fighting to get that last portion you’re owed.

Going to court and following up non-paying customers can be both expensive and exorbitantly time consuming, neither of which many construction companies have the luxury of.

#3: A Subcontractor or Supplier Has Not Been Paid

Subcontractors and suppliers can also place liens on a property if they aren’t paid.

If this happens, a customer may refuse to pay a general contractor until all subs and suppliers are paid.

A Professional Response When a Client Refuses to Pay Contractor Because Someone Else Hasn’t Been Paid

As a contracting company, it is generally your responsibility to both manage and pay any subcontractors or suppliers that you’ve hired.

Establish a channel of open and clear communication with the homeowner or property owner and let them know you’re taking care of the payment issue.

When a Customer Won’t Pay: Contractor Rights and Legal Recourse

If you’re faced with a customer who won’t pay and have made an effort to respond professionally to no avail, you do have a few other legal options to pursue.

From filing a lien to suing for a breach of contract, there are some legal avenues you could explore.

File a Lien

Since contractors cannot simply ask for a return of their services when a homeowner or client fails to pay them, state laws provide them with unique lien rights known as a mechanic’s lien to help them get paid for their work.

A construction, or “mechanic’s”, lien gives builders, contractors, and suppliers legal recourse to get paid for their work as well as any materials or supplies purchased for a project.

When a contractor files a lien, they gain a security interest in the home or property.

That lien clouds the real estate title, making it difficult for the homeowner or property owner to sell it until the lien claim is released upon full payment.

It’s important to note that while all 50 states have construction lien laws, they can be quite different from state to state.

Now let’s say you want to process a $100,000 invoice, but your client isn’t paying.

With the Flexbase payment reminder system, we’ll stay on top of your clients by:

  1. Sending payment reminders automatically over SMS and email to every contact you’ve listed for that client (ie. the client accountant, the business owner, the CFO, etc.).

If there are any third-party contacts involved, like an architect, they would also be included.

  1. The system will send all contacts a reminder every few days.

Now, let’s say you’ve sent out three reminders and still, no payment has been made.

  1. With your approval, we will send a certified mail letter with the intent to file a lien that goes out via FedEx overnight.
  2. If they still don’t pay, we get your approval to file a lien — Keep in mind lawyers could charge thousands to file this paperwork.

Once a lien is filed, your options increase.

Because you’re now on that real estate title as a lien, you’ll be the first to get paid if that real estate asset gets sold or another party comes on board.

Another perk? Some of our lending partners will buy that lien for you at a discounted rate which means you can get cash quicker. The lender will then go and negotiate directly with the client.

With our system, you don’t need to worry about tracking your customers payments — Flexbase will manage all of that for you, for free.

Sue for a Breach of Contract

In order to sue for a breach of contract, you must show that your client failed to meet his or her contractual obligations.

You’ll need to prove that the homeowner failed to pay the amount stated in the contract even though you completed the work.

Two common topics that pop up in construction contract and payment disputes are pay-if-paid and pay-when-paid clauses.

If these clauses are present and you’re in an area that enforces them then…

  • Nonpayment
  • Partial payment; or
  • Slow payment

…might not even be in breach of the contract.

So, in order to be successful in your lawsuit, you’ll need to provide documentation to support your claims.

You’ll want to have:

  1. A copy of the contract
  2. Before and after pictures of the work you’ve completed
  3. Any subcontractor invoices or materials expenses you’ve incurred
  4. All demands for payment that you’ve sent the client that have gone unanswered

4 Construction Industry Best Practices to Prevent a Customer Not Paying for Building Work

When you’re trying to prevent the scenario where a client refuses to pay, contractors have a few options.

And, like many things, it’s best to start at the beginning — aka the very first step of contract negotiations.

You’ll want (and need) to ensure that all of your records are consistent and accurate across all platforms, so you can keep track of your payments.

Thankfully, our app allows you to integrate with all of your current software including:

  • Invoicing tools
  • Project management tools
  • Personal bank accounts
  • Business bank accounts

No more wasted time inputting your company’s data into different accounts.

Eliminate human error with Flexbase.

#1: Always Have a Contract and Include Details on the Scope of Work

While drafting a contract for every job you do can get to be a bit time consuming, it is well worth your time.

When you agree with the customer before starting the job on…

  1. What the project or job will entail
  2. When the project or certain milestones will be completed by; and
  3. How much it will cost

…in a legal contract, you are minimizing your chances of running into payment and communication problems once work has begun.

Outline an Up-Front Payment Amount and Progress Payments

When negotiating the contract for a project, it’s common practice for some amount of money up to be paid front.

What you’re trying to prevent is fully completing the project and having been paid 0% of the contract balance.

To mitigate that risk, you should include progress payments as part of the initial contract.

The term “progress billing” means that you bill based on your progress on the job.

The amount you bill is generally related to the percentage of work you have completed.

For example: If you’re a quarter of the way done with the job, you would bill 25% of the contracted amount.

Or, you could structure your progress payments based on certain project goals, like completing the bathroom floor tile or installing kitchen cabinetry.

While progress payments, in general, are helpful to most contracting jobs, they’re especially beneficial to smaller businesses because they help minimize the potential for a homeowner to refuse to pay after work has been completed.

#2: Invoice Regularly and Be Detailed

The main benefit to progress billing is the speed.

You don’t have to wait until the end of the job in order to bill and you’re able to have a steady flow of cash on a regular basis.

Plus, by billing in smaller installments, you can increase the chance you’ll be able to get paid because it’s easier on the customer’s wallet.

Utilizing progress billing, and specifically AIA billing forms like the G702 and G703, forces regular communication on the progress of a job, and gives you a good insight into how the job is going and where there may be gaps.

With a Flexbase subscription, not only do our customers reap the benefits of automated AIA billing forms, but our integrative software also insures you get paid sooner with tools like:

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#3: Incorporate Regular Payment Reminders

By regularly reminding clients of payments, you will set the tone for effective and open communication.

You and your client will both stay on top of progress payments.

But, if things do get behind, Flexbase’s payment reminder system will gently nudge your clients to pay that overdue invoice.

Our reminders are sent automatically over SMS and email to every contact you have listed for that client, including…

  • The client accountant
  • The business owner; or
  • The CFO

…along with any third-party contacts involved.

The system will send all contacts a reminder every few days.

#4: Offer Discounts for Early Payment

As a contractor, you’re probably well aware of the cash flow problems in the industry.

On average, contractors waited a whopping 50-75 days for payment in 2019.

If you’re a small or midsized construction company, this can cause major problems with day-to-day business expenses like payroll and equipment purchases.

Incentivize your clients with discounts for early payments.

Don’t play the waiting game with your payments anymore.

Negotiate payment terms with your clients using Flexbase and see your hard earned money in the bank today.

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built for construction
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