How Construction Businesses Can Collect the Money Owed

As a business owner, you want and deserve to be paid for your work. Construction-related businesses, by their very nature, are exposed to unique circumstances that present you with increased risks of non-payment, delayed payment or disputes over payments. Many of these potential pitfalls can be prevented.

Sign up for Advisor. It's free!

Current Market Conditions

In recent years not only has the residential building construction industry topped the list of fastest-growth industries, six of the 10 fastest-growing industries among small businesses are related to construction.

However, according to the Bureau of Labor Statistics, for the construction industry about 75 percent of businesses with employees survive their first year, 65 percent make it through their second year and about 35 percent make it through their fifth year.

Even businesses that do not fail experience project failures. In a recent industry survey, only 31 percent of respondents' projects in the prior three years came within 10 percent of budget, and only 25 percent of projects came within 10 percent of their original deadlines.

Impact of Delayed Payments

Construction projects and businesses fail or perform less than ideally for many reasons. Cash flow issues certainly contribute to many business crises, with payment delays and contract disputes significant factors in contributing to cash flow shortages.

  • In 2016 the global average value of construction disputes was $42.8 million.
  • The average length of construction disputes in North America was 15.6 months.

Avoiding Payment Pitfalls: Communication, Contract Provisions and Documentation

The top causes of contract disputes are errors or omissions in the contract document, incomplete or unsubstantiated claims, and failure to properly administer the contract.

Contract Provisions

When negotiating the contract, you might benefit from the advice of legal counsel, who may help include language that protects your interests:

  • Scope of work: Demand your scope of work be clearly defined, free of language that may be open to different interpretations.
  • Change orders: Make sure the contract outlines the process for issuing and approving change orders.
  • No damages for delay: Check for this clause, and attempt to negotiate limitations on enforcement in circumstances such as when delays are caused by the other party.
  • Liquidated damages clauses: Check for a provision that might allow the other party to assess damages against you.
  • Pay-if-paid clauses: Negotiate the modification of language that shifts the risk of an owner's nonpayment from the contractor to you, if you are a subcontractor.

Contractual Requirements

Pay attention to contract deadlines, claims procedures and dispute resolution procedures. You must comply with these requirements in order to maintain your full rights to payments of your claims.

Comprehensive Documentation

It is critical that you document all work performed and costs that lead to a claim. Create a comprehensive paper trail to support all claims, and be sure to submit all necessary backup documentation to support costs.

Diligent Use of Construction Notices

Nearly every state requires sending preliminary notice, the necessary first step to securing your lien rights on a construction project. Failing to send a required preliminary notice by the deadline usually eliminates your future ability to file a mechanics lien in the event of nonpayment.

Some states require the filing of a notice of intent to file a lien, which notifies the applicable party that you intend to file a mechanics lien if payment is not made within a specified timeframe.

In the construction industry, a mechanics lien is one of the most powerful tools for getting paid. When you complete your work on a property and have not received payment, you can record a mechanics lien, which then restricts the owner's title to the property until the amount owed is paid.


About the Author

Written by Seth Smiley.