If late payments are crippling your building company, you need these tips...
It may sound simplistic, but the only way to handle the current cashflow crisis affecting the residential building industry is to enforce building contracts.
You may already have a provision in your contracts for late payments, but if you don’t, adding a special condition that will give you more power in these situations is critical.
Here are 4 tips for enforcing your building contracts to deal with late payments and cashflow issues.
Tip 1 - Review your building contracts
Start by getting a lawyer to review your building contracts. This is something you should be doing every two or three years anyway because times change and if you don’t regularly review your terms then you expose yourself to complications. Including late payments.
Make sure you have a provision to charge interest on overdue amounts as well as a late fee as soon as a payment is delayed. Having these clauses doesn’t mean that you have to enforce them, but you need that power to protect your business.
Tip 2 - Communicate with the client
We’re not suggesting you should take on the client and make them responsible for a situation that is somewhat out of their hands. Instead, you want to turn them into an ally against the bank.
Explain how the late payments are delaying their job, causing significant problems for your company, and that you’ll need to start charging them interest per your contractual agreement if they don’t take action with the bank.
Tip 3 - Suspend work and issue an extension of time (EOT)
When you find yourself in a situation where you can no longer fund your client’s project instead of their bank... and a shortage of cashflow is leading to construction delays, then you must protect yourself against a potential claim for liquidated damages by issuing a suspension of works and an extension of time (EOT).
It’s also important to claim for proportional fixed expenses as per the APB Pricing 4 Profit methodology on a daily basis, as these costs will be significant and destroy a building company's net profit if they are not covered.
It’s not an ideal situation for builders to find themselves in, however by taking action sooner rather than later you have a better chance of getting the project back on track.
It also sends a clear message to the client that any delays have been caused by THEIR bank and not through any fault of yours.
Tip 4 - Charge the penalty and interest weekly
We recommend charging interest weekly so that the disincentive of further payment delays is reinforced consistently and regularly. Every new communication is going to be a jolt to take action.
If you just say you’re going to charge interest and then don’t do it, or it only incurs at the end of the month, it doesn’t have as much impact. By issuing it after 7 days and then again 7 days later you just keep on punching until it generates action.
But make sure you’re doing it with the client, not against them. You are on their team and you want them to chase up the bank so that funds can land, your invoice gets paid, and the job gets completed as planned.
Don’t Accept Cashflow Issues, Take Action
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