Closer look: Insider tips on billing and collection practices
Editor's note: This article is reprinted with permission from Construction Executive, May 2010, a publication of Associated Builders and Contractors Services Corp, www.abc.org. Copyright 2010. All rights reserved.
With more customers facing financial problems than in the past, diligently managing collections is a necessity. Depending on a company’s profit margin, writing off a $100,000 receivable is the equivalent of giving up $1 million to $1.5 million in gross fees—something most firms cannot afford.
In good economic times and bad, some companies get paid more quickly than others and have fewer disputes with customers that refuse to pay. Their secret: a combination of effectively managing the process from beginning to end, good communication and documentation, and appropriate accountability for project managers.
Billing and collection practices
Prevention of collection problems starts with client selection. Remember, firms do not lose money on projects they do not take. But, even a good client’s financial circumstances can change quickly. Many companies perform periodic credit checks for all new clients, as well as those with large upcoming receivables. One approach is to subscribe to a credit service, such as Dun & Bradstreet or Experian. The cost of getting a credit report—between $25 and $100 for a single report—is small compared to the cost of a client that cannot pay. Another approach is to ask new customers for references from their banks and from firms with which they have done business in the past. Successful firms develop metrics for monitoring and assessing clients’ payment performance.
Particularly with larger clients, determine if the person you are dealing with is empowered to authorize your services. It is important to ask questions and understand organizational hierarchy upfront in order to prevent problems down the road.
And, be cautious about accepting more work from clients that have been slow payers or non-payers in the past. If your company decides to accept work from these clients, consider requiring a retainer, and hold the retainer to apply against the final bill. If the client is not the owner of the project, it might be possible to arrange to be paid directly by the owner.
Everyone in a firm should be tuned into exposure levels with all clients, not just the slow payers. If one or two clients represent a significant portion of your company’s accounts receivable, they should receive a proportionate amount of attention and monitoring.
After winning a project, the most critical component to effective receivables management is having a written, signed contract. An oral contract is not any less binding than a written one, but it is much more difficult to prove.
A well-drafted contract clearly sets forth the legal name of the client and the identity of the people authorized to bind the client; when invoices should be submitted; how long the client has to question the invoices; when payment is due; the additional consequences to the client for failure to make timely payments (such as interest accruing, reimbursement of collection costs and a firm’s right to stop working); and the process and forum for resolving disputes.
Assuming a client has good credit and the job moves ahead, establish a billing and invoice follow-up schedule—and stick to it. This is a basic, but often neglected process. When times were better, some project managers and companies were slow to get invoices out the door. After all, who wouldn’t rather meet with a client or design a project than submit hours to be billed?
Firms need to strictly enforce internal procedures. Failure to keep up with submitting hours slows down the entire process and often results in invoices being sent months after the work was completed.
A client’s staff and financial condition can change quickly. If a slow invoicing process results in a firm billing in September for work performed in July, the firm likely faces a difficult environment for collection. Because everyone’s memory fades over time, resolving billing disputes is even more difficult.
Managing the billing process
The following guidelines illustrate one firm’s approach to managing the billing process.
- Project managers submit billable hours, and the initial invoice is sent with a cover letter or email and appropriate backup material in accordance with the billing schedule. Then, the project manager is required to call the client within 10 days to ensure the invoice was received.
- If the terms are 30 days and the client has not paid, project managers are required to start calling the client on day 31 or 32 to determine the reason for nonpayment.
- For the next 60 days, the project manager is responsible for the receivable and makes periodic calls to check on the status of the bill. Project managers are required to be polite, but persistent. Each call is summarized and confirmed in an email.
- Project managers are advised to pay attention to and document their clients’ payment habits. For example, if a client that previously paid on time and in full now pays late or only sends partial payments, the project manager must meet with the client at the first hint of a problem. If there is a problem, it needs to be fixed. If the client is happy and the only problem is slow pay, it needs to be documented.
- Project managers are encouraged to enforce the payment time frame. If something doesn’t seem right, they don’t need to wait until day 91 to escalate. They can take more forceful action sooner if appropriate.
- After 90 days, the invoice is written off for the project manager (so the project profit isn’t artificially inflated) and turned over to accounting. The revenue is re-recognized if received.
- After 120 or more days, the project manager should take one or more final actions to get paid.
Sticking to the plan
To set the tone for effective collections, project managers must understand the importance of their role in the process. Firms that have the most success managing collections typically make it a part of the project manager’s bonus calculations. Some firms focus on behaviors (did the project manager follow the plan?), while others focus only on a target for days to collect.
Handling additional services
Payment disputes frequently arise out of additional services delivered via change orders. The most common complaint from clients is that the architect or contractor performed services not ordered. Three key steps can help prevent such problems:
- Only negotiate requests from an individual the client designates as authorized to amend the scope of services.
- As with the initial contract, accept only written requests.
- Make sure the company can match the scope and fees outlined in the contract.
Communicating with clients
As soon as a client’s payments slow down or stop, communication becomes paramount. Call the client, or bring up the issue at the next meeting. Tackle the issue politely, but head-on. Let the client know the firm is aware that payment is not being received in a timely manner and initiate a discussion. Ask questions to try to understand the root cause.
If the client’s way of telling you it’s unhappy is by not paying, look into the issues and address them. Strangely enough, this is actually a marketing opportunity. If a company shows its commitment to resolving problems, the relationship will be stronger than before it was tested. Always document any resolution in writing.
If the client acknowledges receipt of the invoice and agrees that payment is due, but states it is financially unable to pay, have the client sign off on the following:
- The service provided is what was requested;
- The client is satisfied with the service;
- The invoice was received, and the amount due is correct; and
- The client’s only issue is inability to pay due to financial concerns.
If your company has researched the problem, talked to the client and done everything right but the client still has not paid, final options for collection include:
- Negotiating a settlement. If your company allows a payment plan or deferred payment, insist on a promissory note tied to specific event: the customer will pay X amount when X occurs.
- Suing for payment.
- Filing a lien. Sometimes, just the threat is enough to trigger payment. The time for filing a lien is usually tied to the last date service was provided, and depending on the state, can be short. Investigate deadlines as soon as a payment problem is discovered. A lien might secure preferred rights if the client declares bankruptcy.
- Going straight to the owner (if applicable). If your company is working for the architect or general contractor, but not the owner, it is possible to threaten to go to the owner about the payment problem. If the owner has paid the architect or GC, but your company hans’t been paid, this might change the dynamic of the discussion. As with any threat, follow through to maintain credibility.
- Hiring a professional collector.
- Or, the company can accept that payment will never be received.
Each of these options has benefits and challenges, and each should be considered before deciding on a course of action. Determine whether the expected costs to pursue payment exceed the maximum probable recovery. If they do, the best possible solution may be to cut one’s losses and move on.
Despite the current worldwide economic slump, projects are still out there. Choosing clients carefully, keeping on top of collections, and instituting formal and consistent procedures can help a firm prevent payment disputes and increase its chances of survival.