Demand Letters: What They Are and What to Do if You Receive One
It’s frustrating — but delayed payments are a common occurrence in the construction industry. There’s an “understandable” delay. Then there’s an “am-I-ever-going-to-see-this-money’’ delay.
If you’ve taken all the preliminary steps to recoup your payment, and you’re still waiting, it may be time to send a demand letter.
Dealing with late payments affects your:
- Cash flow
- Time; and
- Efficiency
Sending a demand letter can remedy all of these dilemmas.
If you need to send a demand letter, continue reading to learn what a demand letter is, how it can help, and how to write one.
Flexbase is the easy way to handle the administrative side of the construction business.
Do you find yourself consistently buried in a pile of paperwork, invoices, and emails? And at the same time, you are trying to juggle the cash flow related to the different parts of your construction project?
You wish there was a platform that could integrate all the administrative processes of your construction business, all in one place that’s easy to access.
Flexbase is the platform you’ve been wishing for.
With the Flexbase app, you can:
- Send invoices
- Send friendly payment reminders
- Access working capital
- Generate payment apps with:
- AIA forms
- Lien waivers
- Schedule of values
- Notarizations
- Prevailing wage
- Insurance documents
- Request for advance payment
And when it comes to overdue payments, Flexbase can send or file …
- Demand letters
- Preliminary lien notices; and
- Mechanic’s liens
… so you can get paid and get on with the work of running your construction company.
What Is a Demand Letter From a Builder?
A demand letter is an official document that a builder may send to a party that is late with a payment. The demand letter is a letter that simply states that the obligor owes money to the builder, and the builder is demanding payment.
When invoices and payment reminders don’t result in sent payments, a demand letter is a next step in an attempt to recover the funds you are owed.
When a demand letter is also unsuccessful, builders may resort to other methods like:
- Preliminary lien notices
- Mechanic’s liens
- Lawsuits
Of course, these tactics are used as a last resort, but in many cases, a demand letter may do the trick.
What Is the Purpose of a Demand Letter?
The end goal of a demand letter is to recoup money that is due to you when invoices and other reminders haven’t worked. A demand letter is the first step in negotiating payment arrangements. This is to avoid further measures like filing a mechanic’s lien or a lawsuit.
A builder who sends a demand letter will also want the recipient to know the risk of not following through with payment — as well as the rewards awaiting him when he does pay what is owed.
3 Benefits of a Demand Letter for a Contractor
Unfortunately, late payments are a common problem in the construction business. And they can be a huge headache that costs you both time and money.
Even though contractors have several ways to attempt to chase down payments, like …
- Emails
- Phone calls
- Reminders
… getting paid can still be a challenge, and you may need to go to the next level — sending a demand letter.
#1: Demand Letters Get Needed Attention
When your gentle, friendly reminders haven’t worked, you need a stronger tactic to get the obligor’s attention.
Phone calls are often the first step in payment recovery but aren’t effective when the person on the other end:
- Never answers
- Gives excuses; or
- Offers empty promises of payment
You need a stronger tactic.
A demand letter gets more attention because:
- It is a formal letter.
- It acts as an initial warning that lets the other party know that you have rights, and you plan on enforcing them.
- It can be just the reminder the payor needs if the invoice has legitimately been lost or overlooked.
It gets the attention of all the stakeholders: customer, property owner, lender, general contractor, etc. With so many team members receiving the demand notice, it’s sure to get someone’s attention and get money moving your way.
#2: Demand Letters Can Offer Legal Protections
The federal government has prompt payment laws in place. In many states, prompt payment laws may require a builder to send a demand letter first before taking other drastic actions like filing liens or beginning litigation.
If you do reach the point of going to court, proof of a sent and received demand letter may also help you qualify for receiving attorney’s fees and interest.
Whether you are required to or not, sending a demand letter will always be a benefit in court. A judge will see that you’ve taken advantage of all the preliminary actions at your disposal — before you decided to put on the real pressure.
#3: Demand Letters Can Serve as Legal Evidence
If you end up going to court, the judge doesn’t want to hear you say, “I called them a billion times.” Instead, a judge will want to see a string of evidence showing what you did.
A demand letter is clear proof that you made clear demands, and you’ve taken the proper steps to receive your payment.
How to Write a Demand Letter
Your demand letter should:
- Be on your company’s letterhead
- Look professional
- Be signed
- Be sent via certified mail with a return receipt
Below are more important tips to keep in mind when writing a demand letter.
You’ve been waiting for payment for a ridiculous amount of time. You may be tempted to write an angry letter that personally attacks the other party.
However …
… that’s probably not the tone you want to express to get the result you’re looking for.
You want your demand letter to be direct, professional, thoughtful, and concise, but you also want the recipient to know that you’re serious. It’s possible to be aggressive in a way that is not impolite or angry.
Imagine yourself receiving a demand letter and ask yourself what type of approach would get your attention — and then write your letter in that vein.
When it comes to the details, be general but exact.
A demand letter should give a brief accounting of your situation and the payment dispute. For clarity, explain the details in chronological order. Only include facts. And be precise.
When outlining the payment details, you should be specific.
Include the following:
- The exact amount owed
- Copies of invoices
- The date you expect payment to be received
Of course, you want to receive your full payment. But if you are in a position to take a lesser amount or offer a payment plan, you may have more success in recouping your funds. Know what your limit is. Don’t give in beyond your ability or draw payments out too long.
Nobody wants to go to court.
Let the recipient know what the consequences may be if payment isn’t received promptly:
- A damaged reputation
- Wasted time
- Legal expenses
- Affected credit score
- Etc.
Payment is hard to come by at times in the construction business. Invoking your payment rights may be a necessity.
There are various rights at your disposal. The more of them that you include in your demand letter, the better. You’ll more likely qualify for attorney’s fees, late payment penalties, interest, lien rights, etc.
Don’t skimp when it comes to your payment rights — use everything at your disposal.
Threatening to file a notice of intent to lien or a mechanic’s lien is a promising tactic to use in your demand letter. And using them together may further increase your chances of receiving payment.
The demand letter recipient will want to avoid a mechanic’s lien for a variety of reasons:
- It catches the lender’s attention.
- The owner also takes notice.
- It ties up the property from being sold, refinanced, or transferred until the lien is paid.
- Mechanic’s liens are difficult to challenge and leave the obligor with no other recourse.
- Cash flow is halted on the project.
- The obligor may be responsible for attorney’s fees.
States have different prompt payment laws. It’s to your benefit to include your state’s prompt payment laws in the demand letter, and some states require it.
State prompt payment laws may include penalties, interest fees, and attorney’s fees.
When including the prompt payment laws in your demand letter, include:
- The state statute
- State penalties
- How the obligor is in violation
- The specifics of your demand
Being familiar with the laws of your state is important.
“Prompt” may be defined differently depending on the state, so know what exactly is meant by “prompt” in your state.
Also, private and public projects may have different regulations in your state. Make sure to know what they are.
Everyone wants to avoid issues with the IRS.
Informing the demand letter recipient of a report to the IRS is one of your payment rights that might motivate payment.
If not paid, a builder can write the amount off as an “uncollected debt.” For the debtor, it will be treated as “debt cancellation income.” They must then pay taxes on that income.
Construction contracts can be extremely complex and are filled with countless details, provisions, and clauses. One of the many types of provisions included in modern contracts is “notice claim provisions.”
A notice provision requires a contractor to provide a certain amount of notice before filing a claim — usually a short period like 7-14 days.
If your contract includes one of these provisions (and you forget that it’s there or let it pass by) you could lose your right to file the claim because you missed the window to give notice.
It’s important that you:
- Know if your contract contains a notice provision
- Know what the notice window is; and
- Mention the notice provision in the demand letter, so it can serve as the appropriate notice required to be given
Let Flexbase take care of all these contract documents and notices for you.
One more piece of advice here …
Include a time frame to be paid and your desire to settle out of court — which would be easier and cheaper for everyone involved.
When a Demand Letter Is Received
If you receive a demand letter, don’t take it lightly. Even though you may not be legally required to respond, ignoring it will force the sending party to take further drastic actions.
Take a deep breath and follow a few simple steps to respond appropriately.
Follow these steps if you receive a demand letter:
- Take it seriously.
- Gauge the legitimacy of the claims, and take note of any discrepancies you see.
- Try to ascertain the sender’s motives. Are their claims warranted, or does it seem like an attempt to bully or scare you?
- Decide whether you need legal representation or not. Paying a high attorney’s fee to respond to a demand letter may not be practical unless you have a strong disagreement with the claim.
- Make sure your response is timely, professional, factual, and formal.
- Send your reply via certified mail, and verify receipt of your response.
If you are on the receiving end of a demand letter, ask yourself these questions:
- Does the demand coincide with the terms earlier agreed upon?
- Are the facts accurate?
- Are the amounts correct?
- Is the sender’s accounting of the issue true?
- Is there a clear deadline recorded?
- What further action will the sender pursue?
- Are there any enclosures or other documents included?
You can ignore a demand letter. But it’s not in your best interest to do so.
Even though you are not usually legally bound to respond, you should take all demand letters seriously.
Failing to do so puts you in a vulnerable position. It may force the sender to take further action.
Avoiding demand letters altogether would be preferable, but knowing you have them at your disposal gives you some assurance — should you need to use one to recoup late payments.
If you …
- Want to avoid sending demand letters
- Need to send a demand letter; or
- Receive a demand letter yourself
… Flexbase has you covered.
How?
- You can avoid sending demand letters by using our automated reminder systems to send regular payment invoices and reminders.
- If you need to send a demand letter or other notice, Flexbase can do that for you. Our notices are official, and we file them with the appropriate county.
- If you receive a demand letter, we can help with your cash flow needs and provide ways to borrow working capital when you need it.
Our platform is essentially free to use because you don’t pay the 0.5% fee until you are paid. There are no licenses or subscriptions to obtain.
Our platform is available to use immediately. Get started today and schedule a free demo.
