Construction Collections 101: Five Ways to More Effectively Pursue Collections

By QUINN MURPHY

Quinn Murphy

There are few commonalities in construction. The phrase “no two projects are exactly alike” permeates the industry and is on the tip of every bidding contractor’s tongue. The truth is, every project is just as unique as the conditions that surround it, and because those conditions are rarely identical, similarity is rare.

But if there is one commonality in the construction industry, it is contractors’ need to efficiently collect payment for work performed or labor/materials provided. Payment delays pervade the construction industry and have only gotten worse during the pandemic and globalization of construction supply chains. Creating a system to efficiently pursue payment is critical to long-term success in the industry. Collections can make or break a project and ultimately make or break a contractor. But many contractors don’t know where to begin with construction collections. The process is stressful, expensive and all too often unproductive, creating a very real sense that deciding when and how to pursue collections should be based on a “gut feeling,” reading the proverbial tea leaves or a random flip of a coin.

But the truth is, effective collections require planning, intentionality, discipline and partnering with collections professionals who are committed to these principles for the contractor’s sole economic benefit. While there is no “one size fits all” corporate collections policy that can be implemented across contractors, trades and industry professionals, there are common methods and tools that help contractors recoup payment and maximize net recovery. Here are five of these methods:

  1. Effective collections requires a plan, so have one.

Start to think of collections as an investment, for which a healthy return is both anticipated and expected. You wouldn’t invest in the stock market without a well-defined and thought-out plan, so don’t invest in collections without one either. Many contractors “trust their gut” about which payments to chase and which to let go. Resist this urge. You earn your money through experience and expertise; collections professionals do the same, so utilize that expertise to create a plan that you and your accounting folks can reasonably believe will recoup the money that rightfully belongs to you.

  • Set AR parameters for collections, then revisit them every six months.

Set well-defined parameters for which amounts you will pursue and which you will let go. Set these parameters before the frustration with non-payment sets in on any particular project. Perhaps a contractor may decide to pursue any receivable over $10,000 that is more than 30 to 45 days overdue. The particular parameters aren’t as important as the discipline of holding yourself to the policy without exception. Then revisit the policy every six months and adjust those parameters to maximize your net recovery.

  • Request payment bonds at project onset and send notices of intent.

For bonded projects, always request a copy of the payment bond at the onset to avoid delay if you need it later on. For non-bonded projects, state mechanics’ lien statutes can be confusing, often inconsistent and complex. There is no realistic way for a contractor to learn or adequately digest the legal nuance of precisely what is required under each state law where projects are located. Some states require notice of intent to lien, and some don’t. If you are a contractor operating in multiple states, make it a policy to calendar and serve a notice of intent to lien at the very onset of all projects. This will assure your compliance in states that require it and will have no negative impact in states that don’t.

  • Analyze collectability pre-suit.

Many a contractor has won at trial only to be told that the defendant has no assets and is effectively judgment-proof. We recommend you flip this analysis on its head and run asset searches through counsel on debtors before referring the matter to an attorney or collections professional. A dollar saved is no less valuable than a dollar recovered, so ask for pre-suit asset searches and collectability analysis to avoid throwing good money after bad. Focus on debtors that have robust bank accounts, largely unencumbered real property or expensive equipment that you can lien and sell to maximize recovery.

  • Should I use a collections agency or attorney? Both.

One common dilemma for contractors is determining when to send receivables to an attorney versus collections agency. As a general rule, collections agencies (operating on contingency fees) are better suited for smaller receivables and attorneys for larger ones. The reason is purely economic. If a contractor assigns a $10,000 receivable to a collections agency who writes a half-hour demand letter and collects, the contractor pays that collections professional $4,000 (40 percent) for writing the letter rather than $100 to $200 (one half-hour of time) for an attorney to do the same thing. On the other hand, a collections agency can chase smaller receivables longer without incurring any additional cost unless they recover. In the end, both are important partners in a contractor’s collections toolbox that should be utilized where they are most efficient and effective. As a general rule, most contractors refer receivables under $10,000 to collections agencies and over $10,000 to attorneys, but this should be tracked and revisited periodically to adjust allocation to the most productive debt collector.

No collections system is perfect. All are a work in progress. But by utilizing these five ways to more effectively pursue collections, contractors can recoup payments and maximize net recovery for years to come.

Quinn Murphy, heads both the construction and receivable recovery industry teams at Sandberg Phoenix & von Gontard P.C. He represents contractors in non-payment claims in all 50 states and in helping contractors create internal collections policies that maximize net recovery. Murphy can be reached at qmurphy@sandbergphoenix.com.

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