Google “Why Customers Don’t Pay” and you’ll get literally billions of results. Obviously, this is a big problem that affects many industries. If you take a closer look at those 21.5M entries, you’ll find that a lot of the results offer advice about what can be done to collect from customers who don’t pay. However, this doesn’t really answer the “why customers don’t pay” question.
Shouldn’t there be more of a focus on the reasons why your customer isn’t paying? I think so.
Understanding Why Your Customer Won’t Pay Their Bill
In order to fix a problem – any problem, really – it’s important to understand why the problem is happening in the first place. This is also true for the topic at hand.
Based on some research of a bit of our own data and experience, we have compiled a short list of reasons why customers don’t pay:
Billing Surprise:
For whatever reason, your customer was not expecting an invoice from you, they were expecting the amount to be lower, or maybe, they were expecting the invoice at a later time. Whatever the reason, bad communication can and will lead to a billing surprise on occasion. And when it comes to getting paid, surprises are usually not good.
Lost Invoice:
Many a contractor’s office is a mess with piles of paper – drawings, invoices, receipts, and more – strewn all about. It’s not surprising then, that an invoice gets lost on occasion. Mailed invoices also tend to disappear from time to time.
Forgot to Pay:
It happens. People in the construction business can be extraordinarily busy. They’re also out of the office a lot, running around from job site to job site. When someone has this much going on, it’s easy for things to slip through the cracks.
Customer Can’t Pay:
Managing cash flow is a HUGE challenge in the construction business, and is a topic that we’ve written about before. It can take a very long time to get paid on a project, while at the same time, many projects require large amounts of cash to get them off the ground. When taken together, these two factors can sometimes make it difficult for a project participant to make timely payments.
A Dispute:
This is a massive category, but at the end of the day, the main culprit behind a payment issue is often some sort of dispute.
I think this is a really great list that generally works for most industries. However, as we all know, the construction business operates a little bit differently. Thus, in addition to the reasons listed above, there are a few other, more specialized reasons why construction customers don’t pay:
Misappropriation:
Money is misappropriated somewhere up the project chain, and this, in turn, affects the parties below the level where it happened.
Completion or Change Order Dispute:
There is a dispute about the percentage of work completed on the project or about how a change order was handled.
Conflicting Payment Terms:
Everyone’s different payment terms result in payment delay on the project. If the person above you has 30-day terms, but your terms stipulate that you are to be paid on completion, that might lead to a delay.
Poor Workmanship from Someone Else:
Someone else’s workmanship is in dispute clogging payment from reaching you. This category is especially annoying since it can still happen to you even when you’ve done everything correctly.
Unfair Leverage:
Bigger companies may be exerting leverage over smaller companies.
How Much A Non-Paying Customer Costs You
Everyone wants to ignore a non-paying customer. Dealing with the issue is just difficult, and we hate to look at our books and see losses. Nevertheless, it’s a fact of business and you’re going to go down in flames if you don’t understand the true cost of a non-paying customer.
Here’s the thing: a non-paying customer can be the most important customer in your business.
That’s because just a tiny bit of bad debt has a huge impact on your company’s bottom line. This is especially relevant in the construction industry where profit margins are slim. If you have a 6% profit margin (the industry average for specialty contractors is 6.2% according to CFMA data), you’ll need $417,000 of new revenue to make up just $25,000 in bad debt. (Think we’re exaggerating? Download the Bad Debt Calculator below and do the math for yourself!)
Essential Reading
You Know What Is Expensive? Bad Debt
What to do when a Customer Doesn’t Pay
Okay okay. You understand why a customer doesn’t pay and you understand how bad it is to your business. So, what do you do when a customer doesn’t pay the bill?
Here are a few quick tips:
Remind Your Customer
Sometimes all that’s needed is a (friendly) reminder that payment is owed.
Make it Easy for them to Pay You
Do you accept credit cards? You should. You should consider accepting ACH transfers, checks by phone, even payment apps like PayPal and Venmo. The more options you give your customer to make a payment, the less easy it is for them to avoid paying you.
Get Serious with Them
Construction is built on relationships, and over time, these relationships can sometimes get a little too comfortable. It’s the whole “give an inch, take a mile” scenario – a customer takes a little bit longer to pay this time, a little bit more the next time, until one day, they’re taking 90 days plus to pay their invoices. At some point, you’ve got to put an end to this behavior.
Solutions for the Construction Industry
However, the best thing you can possibly do about the threat posed by non-paying customers is to prevent a non-payment situation from happening in the first place. And how do you do that?
Through a collaboration-first mindset complemented by proactive communication using the tools specially created to help ensure that construction companies get paid the money they’ve earned.
Before you say that this is “easier said than done,” please consider the following proactive action steps that are all available to everyone in the construction industry:
1. Send Preliminary Notices on All Your Projects
A preliminary notice provides visibility to you on the project by officially alerting all of the project participants at the top of the “payment chain” (owners, lenders, and in some cases the GCs) that you are working on the project.
2. Send a Notice of Intent to Lien
A notice of intent to lien is not a lien, but rather, it’s the official step of putting someone “on notice” that getting paid is important. We have described the notice of intent as the best demand letter available in all of the construction business, and the reason for that is simple: notices of intent get you paid. In fact, according to Levelset’s own research, 47% of the notices of intent sent through the Levelset platform result in a payment getting received within 20 days!
3. File a Mechanic Lien or a Bond Claim
Filing a mechanics lien does not mean filing a lawsuit. Rather, it’s the official step of filing (or recording) a lien against the property owner or a claim against the bond.
