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How to Identify Non-Paying Building Clients and Save Money

How to Identify Non-Paying Building Clients and Save Money

What do you do when your building client can’t pay your bill!

So your building client has run into financial difficulties and can’t pay you for their renovation. You stand to lose thousands.

Even an improving construction environment does not compensate. Bad payers have more negative impact on a small building business than any local or national economic environment.

Some builders have lost thousands because a client has not paid. And even if they when they do pay but late your cash flow is affected. You wish you had never met them!

Here’s three ways to identify likely non-paying clients.

1. Clarify your client’s financial position

Most homeowners have no idea of the cost of a renovation. So, check that a proposed job fits within their budget before incurring any cost in designing or pricing.

You may not be able to give a fixed price, but in most situations you can give a “ball park” figure.

Listen carefully to their responses and don’t proceed until you are certain they can afford to pay.

2. Find out any borrowing conditions

It may be that a bank is lending the money or that a family member is funding the renovation.

If a lender is involved it is likely to affect how and when you will be paid. So be clear about their conditions. Don’t get caught because you can’t meet an expectation you don’t know about.

For example a bank may only pay on progress valuations and for goods only once installed on-site, not before they leave the factory. Or, you may have to wait for an inspection that could be delayed through no fault of yours.

3. Calculate profitable deposits

It costs money to prepare “free” estimates and quotes, to gear up for a new job, to purchase new equipment and to recruit/train staff.

Eventually these costs will be paid from profits, but many builders do not realise profit until after the final payment. If your deposit is too small you could be carrying start up and early costs for the duration of the job.

So make a calculation of your pre-job costs, along with the building costs up to the first payment.  Add to this your profit percentage to calculate your desired deposit (calculate instalments in a similar way). That way you can still make profit even if your client quits paying and you have to stop work.

Takeaway

The thing is, if your prospective building clients are not prepared to be up front about their financial situation, or are not prepared to meet your terms, you may be better to walk away having spent nothing. Go find a client who will pay.

Your Comments

I’d love to hear your comments.

How do you approach talking about financial matters?

What financial requirements do you place on prospective clients?

How do you calculate deposits?

Have you been burned by a non-paying client?

Post your comments below.

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2 Responses to How to Identify Non-Paying Building Clients and Save Money

  1. Tim Gore June 1, 2014 at 2:35 pm #

    Q. How do you approach talking about financial matters?

    A. Most of my projects are design build with the construction phase following. This allows me and the client to control costs and their budget. I take it from design to permit issuance. By the time the permit is issued I have a bid package put together including sub-bids, scope of work, a project schedule and a line item cost breakdown and a payment schedule based on six draws. Most of my sub-contractors will reduce their bids by 5% for twice monthly payment and never had a client say no to that. When clients are presented a professional bid they understand performance by both parties is based on mutual trust.

    Q. What financial requirements do you place on prospective clients?

    A. The Design phase (Building Department Coordination, design coordination with the designer and structural engineer are discussed during our initial meeting and a bid is presented with three draws:
    1. Thirty-five % due on signing, Thirty-five % due completion of Architectural % Engineering and 30% prior to submission to plan check plus plan check fees. At completion of plan check fees for permit, fire fees, school fees etc are due prior to issuance of permit.

    Q. How do you calculate deposits?

    A. I’ve covered deposits through the building permit issuance above. During the construction phase I don’t require deposits since by that time the design phase has established a pay record so deposits are not necessary but draws are generally every two weeks due at presentation of invoice if a 5% discount is opted for by the client. I take the check to the clients bank and convert to a certified check, deposit to my account and my bank cuts certified checks to the subs and I disperse that day receiving lien releases on conditional progress payments and unconditional lien releases for previous progress payments.

    Q. Have you been burned by a non-paying client?

    A. Nope! As I follow the procedures above to insure I get paid and my subs as well they are always happy to bid my work as it’s money in the bank.

    Also I have an Iron clad unilateral both with subs and the owner.

    • Graeme Owen June 2, 2014 at 8:40 am #

      Hi Tim.

      Thanks for this comment.

      There is no doubt that being able to work with a client from the design phase is definitely an advantage. It gives time to assess the commitment, clarify the budget, and at the same time build a strong relationship.

      Do you have in-house designers? If so, how do you gain your client’s confidence in them? Or, do you have a special relationship with several designers that you recommend and let the client choose?

      When it comes to bidding/quoting for the construction, how do you handle the desire of most people to get other bids/quotes as a check?

      You certainly set up your clients to feel they are winning when they choose you: no deposit and 5 % discount!!

      Do you make this feature a distinguishing mark in your advertising?

      Thanks again for valuable comment

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