Communication is one of the most difficult – but most critical – parts of managing a successful construction project. Figuring out who to share information with, when, and how to share it can be frustrating. The bigger a project is, the more important it becomes to communicate with the right people clearly, consistently and effectively.
Researching your customer's credit and payment history can yield important insights that help you create a more effective communications strategy. This applies to all phases of a construction project, from the bidding process to collecting payment.
How payment history affects communication
Imagine you are preparing a proposal for a new project when the GC tells you that they are not planning to pay on time – if at all. How would you react? As refreshing as their honesty may be, I imagine any contractor worth their salt would abandon the project immediately.
Here's the crazy part: This scenario happens all the time, in residential, commercial and government projects across the country. Late or non-payment is disturbingly common in the construction industry. In fact, in a 2019 survey about construction payments, 97% of contractors said they had to threaten to file a lien to get paid.
Of course, no GC or owner will tell you about their plans to snub you on payment before the project begins. In fact, it's likely they're planning to pay everyone on time. After all, late payments are bad for business – they trigger lien claims and lawsuits. But despite their best efforts, and for a variety of reasons, some GCs and owners develop bad payment habits.
Knowing the payment history of a project's owners and managers can help you make better decisions. After all, you may decide not to submit an offer. If you accept the job, their payment practices may inform the way you communicate with them throughout the project.
How to Get a Contractor's Credit and Payment History
Although typically only available to larger businesses, obtaining a contractor's credit report from a company such as Dun & Bradstreet or Experian Commercial can provide information about your history of paying bills on time, including whether there are indicators of slow payment, such as mechanical liens. A credit report also indicates the size of the supplier's existing credit lines.
Research self-pay practices
You can ask the contractor for a list of previous clients and suppliers and contact them directly to find out their experience. Or you can use data available from Levelset's contractor payment profiles, which provide ratings on payment speed and display a 12-month history of slow payment warranties and warnings. The platform also includes ratings and reviews on the contractor payment practices of other construction companies.
Good communication habits in construction
Good communication habits will be helpful on all projects, regardless of the contractor's payment history. Open and transparent communication builds strong relationships with the contractors you want to work with again. And perhaps most importantly, it protects your pay when you work for a GC with a history of pay disputes.
Always send advance notice
A advance notice is typically a document sent at the beginning of a project. Depending on the state you are working in, it may be called a Notice to Owner, 20 Day Notice, or Pre-Lien Notice. It introduces the parties that control payment and tells you what work you are involved in. In some states, advance notice is required to protect your warranty rights. But even when it's not mandatory, this notice can be an effective tool for opening lines of communication from the start.
Establish a credit policy
When you send your first invoice or payment request, include a copy of your company's credit policy, including how you handle collections. On a construction project, relationships are built on clear expectations. Sharing your credit policy tells the contractor exactly what to expect if they don't hold up their end of the bargain. Just make sure you follow your credit policy. Few things can derail a professional relationship like false promises.
Use reminders and demand letters
An invoice reminder can be a useful tool to ensure you get paid on time. The people who run your client's accounts payable department want to make sure everyone gets paid in a timely manner. Sending friendly reminders before and on the due date can help keep you on top of the pile when they sit down to cut checks.
If payment is late and the contractor has a history of slow payments, you may decide to take a more forceful tone with a demand letter or a Notice of Intent to Lien. Depending on your situation, you may want to look into your state's Quick Pay Act requirements and penalties or even threaten to report the debt to the IRS.
Exchange Warranty Disclaimers Correctly
Think of the warranty disclaimer as a communication tool. By signing a lien waiver, you are effectively thanking the GC for the payment and promising that you will not place a lien on the property. (Important note: Warranty disclaimers sometimes contain problematic language that can end up waiving more than just your warranty rights. Make sure you know what the warranty disclaimer says before you sign it.)
Sending a conditional lien waiver with your payment app lets the GC know that you value the relationship and respect their time. Please keep the unconditional waiver until after you receive payment. Using lien waivers correctly can put the GC or property owner at ease and help strengthen your relationship.
Protect your lien rights
A mechanics lien is one of the most effective tools contractors and suppliers have for getting paid. Each state has its own requirements and deadlines for filing a mechanics lien. Typically, this involves sending specific notices or filing documents according to a required schedule. But following lien requirements doesn't just protect your right to use a mechanic's lien if necessary. Exchanging the right construction payment documents at the right time is part of a complete communication strategy.
Payment history isn't everything
Ultimately, a contractor's payment history can help him plan for the future, but it does not predict it. A contractor with a good payment history can turn into a slow-paying contractor overnight if he starts taking on the wrong projects.
Sometimes a better indicator of payment risk can be the project itself. Analyzing project financing can provide a more accurate picture of the payment risk for the work. After all, construction payments trickle down from the top down. If the owner or investors start a project without enough money to complete it, everyone's pay could be at risk, including the GC.
However, familiarizing yourself with a contractor's payment practices is a simple step that can inform your communications strategy during the job. If they've never missed a payment, you may decide to adopt a gentler tone in your communication. If their history presents several red flags, you may choose to adopt a more serious tone of communication from the beginning.
Whichever approach you take, protecting your warranty rights should be an integral part of it. In general, everyone who works on a project has the right to be paid for the work they perform. Clear communication can help encourage good payment practices by third parties – but it does not guarantee it.
