11 min
Managing Payment Terms For Your Construction Business Clients Contractor Success Map with Randal DeHart | Contractor Bookkeeping And Accounting Services
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- Marketing
This Podcast Is Episode Number 496, And It's About Managing Payment Terms For Your Construction Business Clients Getting paid correctly and on time by customers can be a constant frustration for business owners. Communicating your terms is the best way to ensure you aren't out of pocket – or are left chasing debtors.
Investors, developers, and shrewd business people designed the most popular method - those who understand the concept of divide and conquer - it is when contractors get little or no down payment for a construction project, do all the work, including change orders, and then try to collect their money.
What often happens is that contractors hate paperwork preferring to keep everything in their heads. Then when it comes time to collect their money, they have to re-sell the job and talk their customer into parting with their money.
Contractors who finance working capital with their own money and whatever they can borrow will earn less profit and put themselves at a higher risk of failure than contractors who use Other People's Money (O.P.M.).
The importance of setting your terms of payment
Your payment terms let clients know when and how you expect to be paid. Setting your terms and letting your customers know your expectations gives you better control over your business and a valuable platform for resolving potential payment issues.
Remove barriers to sale
Setting payment terms shouldn't discourage regular or new customers from doing business with you – there are advantages to giving clients several options.
Encourage clients to hire your services and remove barriers to the sale by making the purchase as easy as possible through a variety of ways to pay, including:
Mobile payment options. Cash or check. Bank deposit. Online money transfers to your bank account Debit or credit card payment. Take the time to become familiar with all these options and their relative pros and cons.
You might, for example, decide to accept only major credit cards, offer a discount for cash, or give your staff leeway to negotiate cash discounts if customers request this.
Know your industry's norms
It's worth researching your industry's generally accepted payment terms and terms competitors use. This doesn't mean you have to follow suit. You may be able to spot a gap or opportunity to be more flexible. The following examples could build a competitive edge:
Feature more payment options than most competitors. Provide quicker and easier ways to pay. Offer a discount for cash deals that give you immediate cash flow and protect you from credit payment defaults. Offer longer payment terms in return for a slightly higher price. Investigate faster and more convenient ways to pay using the latest smartphone technology. Offer variations for payment
There are numerous terms you can set out for your customers to pay. Sometimes it's best to use a method that works for you both.
Payment in advance
Some businesses, such as those operating over eBay or other auction sites, require payment in advance to protect against possible online fraud.
Customers first pay the purchase price (including shipping costs). You then wait for the payment to clear before supplying your services.
Although this might not work for your type of business, still be wary of relying on a bank deposit or email confirmation not sent directly from the depositing bank as proof of payment.
Progress payments
These can be useful when working on a lengthy project, such as building a house or a massive remodeling project.
Progress payments serve two critical purposes:
1. They provide a regular cash flow to pay running costs.
2. They protect you against total loss if your client goes bust.
Standard practice is to build progress payments into contracts based on measurable milestones.
Early payment discounts
Early payment discounts can encourage people to pay on time. They're more useful on higher-margin services as the
This Podcast Is Episode Number 496, And It's About Managing Payment Terms For Your Construction Business Clients Getting paid correctly and on time by customers can be a constant frustration for business owners. Communicating your terms is the best way to ensure you aren't out of pocket – or are left chasing debtors.
Investors, developers, and shrewd business people designed the most popular method - those who understand the concept of divide and conquer - it is when contractors get little or no down payment for a construction project, do all the work, including change orders, and then try to collect their money.
What often happens is that contractors hate paperwork preferring to keep everything in their heads. Then when it comes time to collect their money, they have to re-sell the job and talk their customer into parting with their money.
Contractors who finance working capital with their own money and whatever they can borrow will earn less profit and put themselves at a higher risk of failure than contractors who use Other People's Money (O.P.M.).
The importance of setting your terms of payment
Your payment terms let clients know when and how you expect to be paid. Setting your terms and letting your customers know your expectations gives you better control over your business and a valuable platform for resolving potential payment issues.
Remove barriers to sale
Setting payment terms shouldn't discourage regular or new customers from doing business with you – there are advantages to giving clients several options.
Encourage clients to hire your services and remove barriers to the sale by making the purchase as easy as possible through a variety of ways to pay, including:
Mobile payment options. Cash or check. Bank deposit. Online money transfers to your bank account Debit or credit card payment. Take the time to become familiar with all these options and their relative pros and cons.
You might, for example, decide to accept only major credit cards, offer a discount for cash, or give your staff leeway to negotiate cash discounts if customers request this.
Know your industry's norms
It's worth researching your industry's generally accepted payment terms and terms competitors use. This doesn't mean you have to follow suit. You may be able to spot a gap or opportunity to be more flexible. The following examples could build a competitive edge:
Feature more payment options than most competitors. Provide quicker and easier ways to pay. Offer a discount for cash deals that give you immediate cash flow and protect you from credit payment defaults. Offer longer payment terms in return for a slightly higher price. Investigate faster and more convenient ways to pay using the latest smartphone technology. Offer variations for payment
There are numerous terms you can set out for your customers to pay. Sometimes it's best to use a method that works for you both.
Payment in advance
Some businesses, such as those operating over eBay or other auction sites, require payment in advance to protect against possible online fraud.
Customers first pay the purchase price (including shipping costs). You then wait for the payment to clear before supplying your services.
Although this might not work for your type of business, still be wary of relying on a bank deposit or email confirmation not sent directly from the depositing bank as proof of payment.
Progress payments
These can be useful when working on a lengthy project, such as building a house or a massive remodeling project.
Progress payments serve two critical purposes:
1. They provide a regular cash flow to pay running costs.
2. They protect you against total loss if your client goes bust.
Standard practice is to build progress payments into contracts based on measurable milestones.
Early payment discounts
Early payment discounts can encourage people to pay on time. They're more useful on higher-margin services as the
11 min