Understanding the Reasons Behind Delayed Payments in Construction Industry
Let’s model a common situation in the construction industry: you have fulfilled your part of construction site work. And you think everything has been done on time. There are no claims from your client, but you still haven’t received the final payment from him. Or maybe there are some problems, but you think they are not major, and your client refuses to pay. This doesn’t happen often, but when it does, there are usually some signs that something has gone wrong.
They just forgot
There could be many reasons why your client is not paying. First, and hopefully this is your case, your client simply forgot, your invoice is stuck on their system, or some person who is responsible for payment or approval is on vacation. This happens a lot, and before starting to think something bad about the client, we do suggest asking in a kind manner how things are going with payments and whether you have managed to pay our invoice. In large companies, invoices go through many checks, and often they get stuck.
Client goes through a cash flow issue
Clients, like anyone else, can have cash flow issues. Even if you studied your client before signing the contract, they still can have cash flow issues at the later stage. There can be two types of cash flow issues:
Short term cash flow issues because of other investments
Your client might have started another project or projects, and they are facing short term cash flow issues. If this is the case, then you should re-negotiate with your client another payment plan that is acceptable to him.
Cash flow issues because of problems in projects
If your client is facing cash flow issues because he is facing budget problems, then this is a red flag. First, you have to understand how many other ongoing projects your client has and what the situation with them is. Often large clients say that they have run out of budget, but that is only true for that specific project, and they are squeezing cash flow only for that specific project. If they are doing just that, then you might end up with getting the payment you have agreed on, but they will probably not pay you for some additional work (if you have done that). However, if you find out that the company has cash flow issues all over, you have to be more demanding with your invoices. You have to rethink carefully other possible upcoming projects with this same client and maybe even start some of them, which will give you leverage to get money from the first project. But this is also tricky. We do suggest that you sit down together with the client to have an honest discussion of how bad things are and how you can help.
Your client refuses to pay because of contract delay penalty
Be reasonable and honest with yourself. If you are late, your client is allowed to charge you, but before he does, try this: review your works and see if you have done any extra work; if you charged for it; and if you requested additional time. Extra work is very often a schedule killer. You accept extra work, but they add extra pressure to the team and overall planning because extra works happen suddenly, and research says that actually extra works consume twice as much time as it has been initially planned. Why twice the time? Because first you evaluate the additional work, then you have discussions with your team and other subcontractors, and then you finalize the agreement by having discussions with the client. Then your client rethinks everything and confirms, and you start to rush things because usually he confirms a little late. Isn’t that a lot of time? So if you have these additional works, go and talk to your client, let him know, and remind him of what you have done. But keep in mind that if your client has been facing budget problems, then most probably he will charge you for delays. Almost all clients do this. When they suffer pain, they want to share it with others.
Your client refuses to pay because the work was not performed well
It is best if you are fully aware of your clients quality standards before entering the project. Because it may turn out that for some your performance and craft is good enough but for some it is not. Usually codes or standards regulate what is acceptable quality and what is not. When standards are ‘unwritten’ they may be heavily influenced by the project’s level of technical difficulty, architect’s vision or even the client’s own understanding. If standards say nothing about quality, talk to your material supplier and ask him what constitutes good quality. Ask him to share pictures, or even better, ask him to come to the site where he affirms that the quality of your work is great. In many cases, where quality standards and client’s expectations are high, mock-up models are made beforehand to agree on desired results.
If you don’t receive payments from your client, check what happened. If your client is a large company, then very often your invoice can get stuck because they have many checkups. But if they have cash flow issues, you should sit down with them and negotiate a new payment plan, which should then be monitored. That is another story if the client refuses payment when there is a schedule or quality issue, but this can also be renegotiated, as we discussed above. So as long as your client hasn’t filed for bankruptcy, there are always ways to get your well earned money.