How Distributors Can Identify Slow Payment Before It Happens

Watch part 1 of our Credit Manager Coaching Series and become the payment hero of your construction company.

Martin Roth, Levelset Chief Revenue Officer, has over 8 years of experience helping credit managers and controllers successfully deal with slow payment. After working with credit managers and controllers at some of the largest suppliers and contractors in the country, Martin knows the tips & tricks to make your life easier and your payments smoother.

This 3 session virtual class is designed to help credit managers see the processes and practices that help credit departments level up.

• Part 1: How Distributors Can Identify Late Payment Before it Happens (Watch Now)
• Part 2: How to Control and Influence DSO with Lien Rights (Watch Now)
• Part 3: Eliminating Overdue Invoices with Data (Watch Now)

Full Transcript

Martin:
What we want to talk about today is how distributors can identify late payment before it happens. And specifically we’re talking about construction projects. So at levelset, we we, we work with contractors, subcontractors, and suppliers, and distributors to help them get paid faster on their construction projects. And I’ve been at this for eight years. We have learned a ton. Justin, I just saw you log in. Yep. Go ahead and turn your video off. So I bet it then at this for eight years, we’ve learned a ton about the construction industry and how payment happens on construction jobs. We process and add to our platform over a hundred thousand projects. Every single month we work with very large distributors and suppliers everything from electrical plumbing, HVAC equipment rental we work with distributors across the construction industry. And so we have a very deep and rich understanding for not just where problems come from on construction projects, but how to address those problems, how to get ahead of them so that you aren’t suffering from late payment.

Martin:
And I’ll start off by saying, you know, what are we going to learn today? We’re going to talk about how, how to identify your riskiest customers, which projects give you the most payment issues, how to use lien rights to escalate problem projects so that you can get ahead of having to file the lien. Because we want to, we want you to avoid having to file a lien, of course. But more importantly, it’s about the relationships that you have with your customers for distributors. Most distributors that we work with are dealing with a pretty wide portfolio of accounts and contractors that they support. And those relationships are very critical to their business as they are with any business. And when we think about when we think about the economy right now and, and the market that we’re all trying to… Whether you’re surviving or thriving, one of the things that’s really important is that your relationships stay intact and that you keep cash in the business because as you’ve all heard Cassius King, especially in construction and especially right now, when most companies from the owner, all the way to the supplier are taking a hard look at their P and L and taking a hard look at the job site and making sure that the payments are lined up and they’re being hypercritical that who gets paid first and who gets paid second.

Martin:
So with that in mind, I do want to mention, we publish this construction payment report. Every year, we just launched this in the spring and we had over 500 people respond. We, we produce a survey and we just get the sentiment of the market for what’s happening in construction payment. And there’s some interesting takeaways here for distributors and especially for credit managers or controllers or financial execs who are looking at their aging and trying to make sense of, okay, how do we navigate the next six months in the construction industry with all the uncertainty out there? And uncertainty has gotta be the most overused of the year so far, but I can’t ignore it. It’s definitely a tumultuous market that we’re all working in right now. So we do this construction payment report. We had over 500 respondents, excellent turnout, great data.

Martin:
And there’s three things that I want to point out. 80% of the contractors that responded. They spend a substantial amount of time chasing down payments on the, on the construction project. 84% of contractors experienced delays on some or all of their projects. And mostly importantly, 54% of contractors. So more than, and half say that payment delays are caused by slow payment above them on the construction project. This is key. If you remember one thing today, more than anything else, is that normally on a construction project, when non-payment happens, it very rarely has anything to do with the relationship you have with the customer. It usually has to do with what’s happening on the project. What’s happening above, above your customer, on the project. That’s normally what causes slow payment. And we’re going to get into the details of that. So why is it so difficult to get paid on a construction project for the purpose of this conversation, we’re going to rule out bad actors.

Martin:
So somebody running off to Vegas with the money or somebody who’s just being either negligent or, or, you know, trying to do something illegal. We’re going to rule those out. I mean, they certainly exist and it does happen, but can’t operate a business based on a corner case. And they were talking about operating a business based on the average, which is most construction projects. And, and what, we’ve, what we’ve seen with working with distributors and contractors and general contractors we’re gonna, we’re gonna focus on the average. So ruling out bad actors, why is it so difficult to get paid on a construction project? So let’s take a step back and think about what is a construction project. And who’s involved in a construction project. Construction projects are complex from the very start. So you have an owner, a developer, a public entity government who needs to build something and they go hire a general contractor.

Martin:
And that general contractor is usually accompanied by an architect and an engineer, potentially a construction manager. There’s almost always a bonding company or surety on the project, especially if it’s public, but even on private projects. You’ve any of you have likely seen that binding capacity is really important for general contractors. Then they go to the, then they go and bid the project out and they bring sub contractors, specialty contractors onto the job. And then for distributors, that’s your customer, right? The subs, the sub subs, potentially the GC, but usually they’re, the contractors are coming to the distributor to get the materials, to get the electrical wire, to get the lumber, to get whatever it is that they need for the project. Right? And every single construction project needs across all of these parties from the start to the finish. So from the beginning of the project, when the foundation is laid through the walls, going up and the electrical and the plumbing getting installed, the drywall, the finishing there’s this process, and there’s all of these actors that must coordinate together.

Martin:
And it’s really difficult to get a bunch of different companies to coordinate together in any circumstance, but it’s especially difficult in construction. When you’re dealing with the weather or you’re dealing with a different size companies, you have sometimes multinational distributors who are working with a local or regional specialty contractor. That’s working with a smaller general contractor. So there’s, there’s varying company sizes company sophistication levels varying personalities. And everybody must work together to coordinate, to make the project happen on time and under budget. Then you throw paying into the mix and that’s where it becomes even more complicated, right? So why does slow payment happen? If we know what a construction project looks like? We know that every project is a fingerprint and unique because that same group of people is very unlikely to come exactly together in the same way on any other project.

Martin:
Why does slow payment happen? The reason it happens is because payment problems here at the bottom at the supplier or sub subcontractor level, usually start up at the top on the construction project. And they start because of all the reasons that you’ve experienced in your time in the construction industry, I’m sure which is that there’s a, a worksmanship dispute. There’s a delay because of weather. There’s a delay because a shipment didn’t arrive on time. There are disputes over the design or how to implement a certain thing. Delays happen on construction projects all the time. It’s part of the process of building any structure and those delays, what they do is they create disputes. And those disputes lead to contractors, withholding payment from who’s owed payment until the dispute gets resolved. And the challenge that distributors have is that they’re at the bottom of the payment chain on a construction project.

Martin:
Money goes from the owner or the lender to the owner then to the GC, then to the sub then to the supplier or to the distributor. And best case is that the customer that you have has a strong balance sheet. And when you’re running credit checks and you’re assessing the viability of the credit line that you’re going to give to that contractor, it’s important to understand their, their ability to cashflow a project, but at the end of the day, if they don’t have enough cash on their balance sheet to pay within the within the terms that you’ve given to them and it, and it issues. In some cases you have general contractors who make it as a rule because of their contract with the owner that they’re not going to release payment until disputes get resolved. And so it’s really important to understand the dynamics are beyond just the relationship that you have with the customer that you’ve given a line of credit to.

Martin:
Right. So how do we identify risky customers when you’re thinking about your port folio, you’re thinking about who you’re extending gratitude or who you’ve already extended credit to, how do you identify who’s risky? The first thing is you want to make sure, you know, who’s on the job because remember it’s not just about your customer. It’s about who else is on the project. Is that general contractor does that generally contractor have a good reputation, does that general contractor, do they have a strong balance sheet? Not that you’re going to get a copy of the P and L for the general contractor for the job that you’re supplying material to, but at a high level, you can identify who is risky by looking at who else is on the project to see if there’s any risks on the project. Specifically, you want to look at your customer’s customer and you can research these stakeholders to understand what their payment practices are.

Martin:
So there’s interesting things that you can pull out, do they, do they require retainage on the job? If so, how much is the retainage because that could impact your ability to get paid, especially if you, if you’re supplying material or doing work, that’s late later on the, in the process of the construction project we have levelset. If you go to levelset.com, you can, we, we built a tool that helps specifically with this. This is a free tool. I’d encourage all of you to go there. If you go to the website and look at search contractors, which is up here on the, on the top left, and you can search for payment profiles for specific contractors and go see what the payment reputation is for those contractors. And I pulled one up as an example, Snyder Langston, it’s linked right there on the homepage.

Martin:
Whenever you go to search a payment profile, but this is a tool that you can use that while we’re doing is aggregating information for you. But it’s things like what are, what, how are these contractors rated by the partners and vendors that they choose chosen to work with on the job? Have there been any liens filed on a, on a project that this contractor is looking for? It, you know, that’s a, that is a an age old practice in credit management, which is you’d go, you know, it’s kinda tough to get your hands on the data because you need to previously go down to the County to go see if a lien was filed. We aggregate that information because it’s important to, to look and see if there’s liens filed on a project that this contractor is running. Then there may be some risk there.

Martin:
And so you just want to, you want to highlight those projects and just keep an eye on them to make sure that the aging on that project doesn’t run out too far. So when you’re looking at and assessing not just your risky customers, but the risky projects, does the contractor have good payment history? Is there a retainage on the job? What’s the size of the retainage? And then are there any liens filed on this contractor’s projects? Because those can influence your ability to get paid on that project. You know, normally when we work with a company and when they start working with us, we take a look at their aging and their aging looks, something like this. This is just dummy information or sample information where you have the original amount of the invoices that are outstanding. You have the outstanding amount of the invoices.

Martin:
And then you have a 30, 60, 90, and overdue past 90 look. And some people coordinate it by color code. Whenever we look at, at an aging that looks like this, one of the biggest challenges with looking at aging is that it just looks at the account, which doesn’t pay enough respect to the project, which is where we see the biggest risk in getting in, getting paid on a construction project. Is that when you look at a specific customer, you really need to look at what’s going on on the project and is this project risky? Because that’s going to determine when, whether or not I’m going to get paid. You know, so how do you get ahead of slow payment? When you’re looking at aging, you can double click on your customers, look at the specific projects, our job accounts that you’ve extended credit to.

Martin:
And then it’s really important too, lean into the lien rights component of it, beause that’s the recourse you have on any receivables that you have out there where you’ve got material on the job or equipment rented on the job, your recourse, your your ability to get paid. It’s very closely related to how you’re managing lien rights on the project, especially for risky projects. We like to say that the best way to get to the front of the line to get paid on a project is to make sure that you’re in a secured position. And that’s, you know, that we’ve spent, I spent the last eight years helping contractors and suppliers navigate a very complicated lien rights process to make sure that they are at the front of the line to get paid. So the first step, no matter what state you’re in, it’s always important to understand whether or not there’s a preliminary notice requirement.

Martin:
And the reason preliminary notices are important is because you need to start the job by making sure that you’re seen on the job by the GC and the owner, and think about it. It’s always just a quick history lesson. It’s always remember that preliminary notices were not invented by distributors or any sort of lobbying group that was trying to create more overhead or compliance for distributors. Preliminary notices were created by owners and GCs. They wanted this because they want to know when a distributor’s on the project, why they want to know what a distributor does on the project, because they don’t want to get a lien. They want to make sure that everybody he gets paid on the project so that they don’t have a lien or any sort of issue. That’s going to delay their ability to complete the project. And so it’s critically important that if they want to know that a distributor is on the job, distributors gotta tell them that they’re on the job.

Martin:
And one of the things that you see on construction projects is if you’re raising your hand and saying, Hey, I’m delivering material to the job or whatever the amount is. And I’m protecting my lien rights in the event, I don’t get paid where we have the right to file a lien. It’s just good business. It’s best practice, general contractors, just like they expect a lien waiver from their vendors and from their vendors vendors. So should they expect a preliminary notice from their vendors? And we see a lot of distributor and supplier customers who even send preliminary notices in States where it’s not required by law. And the reason they do that is because, well, they’re, they’re getting waiver requests from their customers and from the GC anyway. And so it’s just a good way to make sure that everybody has seen on the projects.

Martin:
Everybody know who knows who’s doing work once the job starts. It’s important to make sure you’re reviewing the contractors on the job to identify which projects are the highest risk, and then make it easy for your customer to receive waivers. Because as another thing that delays payment is not being able to get, for a subcontractor, is not being able to get the pay application, tidy enough into the hands of the GC to get it approved. And that process of submitting pay applications, getting them approved the back and forth over the amount that’s actually owed before the check gets written. That’s a place where you can support your customers as a distributor, by making it easier for them to get the waivers that they need, whether it be a conditional waiver as you’re waiting for payment or an unconditional waiver, once you’ve received payment, very important to be partnerly in that process to make it easier for your customers.

Martin:
And then finally track your lien deadlines. You know, we see a lot of companies that before they start using levelset, they’re using spreadsheets and post it notes and all kinds of different things there, they’re running they’re aging once a week, and then doing the calculation to figure out when the lien deadline is it’s really important that you have some place that keeps track of and alerts you when you have a lien deadline coming up. Even if you decide that you don’t want to file the lien because of the relationship you have with the customer, that’s fine. At least you’re making a conscious decision not to file the lien as opposed to letting the lien deadline expire, and then not having any recourse. If you don’t, if you don’t get paid on the construction project. So super critical to get ahead of slow payment, make sure you send your preliminary notices and make sure you make it easy for your customer to get the waivers they need so that they can submit their pay application.

Martin:
And then finally track deadlines so that you don’t lose lien rights unintentionally. And then throughout the project, once you start to age a little bit on the, on, on those receivables, once it gets to 30 days or whatever terms that you’re giving to your customer it’s important to send payment reminders. If you don’t have a solution or system that can do this automatically, even sending the resetting the invoice email is a great best practice reminding customers, what they have outstanding reminding customers that they, that they do a payment. It helps. Sometimes the squeaky wheel does get the, get the grease. And so making sure that you’re staying top of mind with your customers, especially if the outstanding amount is significant because you want to make sure that you stay at the, at the front of their workflow and then if it starts to age even more, well, we see a lot, like I’ll take an example in California.

Martin:
The standard time to file a lien is 90 days from the completion of work and it’s substantial completion of work, and it varies from state to state. But if you have a 90 day window to file a lien and you’re starting to get to 65, 70 days past when the work was completed and, and your invoice is aging out. It’s important to send that payment reminder. So our, I’m sorry, send a notice of intent to lien, to let the customer know that you are that you are filing or you’re thinking about filing a lien and you are willing to take that next step before you ever had, I’ve actually have to file a lien. And then finally you want to talk it out like you need to connect and collaborate with your customer and with the GC, if there’s a dispute, try to work it out, communicate.

Martin:
The, the easiest way sometimes is just to pick up the phone and call your call your customer, get on the phone and explain the situation. Usually you can work through disputes. We hate to see when liens get filed and there was no effort to resolve the conflict before they hit the nuclear button and filed that lien. So you have the bunch of options available to you to resolve conflict, to get ahead of slow payment. A reminder, 54% of contractors say that payment delays are caused by slow payment above them. And as a distributor, it’s important to understand that your customer it’s, in most cases, they’re not trying to string you along. And remember, we’re ruling out that. They’re not trying to string you along. It’s normally because payment is withheld on the project and they’re trying to keep their finances within that project because you don’t want to borrow from other projects to pay invoices.

Martin:
And with that in mind, it’s good to be a good partner and make sure you’re seeing on the job, make sure that you’re making it easy for your contractors to get what they need to submit their pay application so they can get paid. So ultimately that you can get paid. The number one reason for slow payment is a problem on the construction job. It’s just a reminder, it’s normally about the construction job. The number one reason for slow payment is because something happening on the job above the relationship with your customer, get ahead of payment issues by understanding the project risk first, and then having the right systems and processes to protect your lien rights and communicate effectively across the job, not just with your customer, but to everybody else. That’s a stakeholder in making sure that you’re getting paid. You want to learn more.

Martin:
Obviously we can help. We do have a software product that helps distributors streamline this entire process. We alert, alert you whenever a lien is identified on a construction project that you’ve you’ve got in your system. We help you prepare the documents to send preliminary notices exchange waivers. We can make this whole process super simple for your team, you or your team. If you’re interested, you can go to level set.com and you click that request to call button and we’ll want somebody from our team from my team is going to reach out to you to help you understand how you can get benefit from levelset. If you do have questions, this is my contact information. You can email me directly at martin@levelset.com. Again, we will follow up with a recording of this webinar and with with the slide deck. So you have it for reference and, you know, please do reach out if you’re interested in learning how level-set can, can support your business. And you know, most importantly, make sure that you’re looking at those projects and getting ahead of the project risk by by looking at the contractors and seeing, looking at the project, as opposed to just your customers with that. Thank you everyone. Have a great day. I appreciate your time.