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The builder owed me $10,000 and he was dodging me," says Daniel Boone, technical training director for the National Wood Flooring Association since 1996, and previously a long-time wood flooring contractor in Florida and Georgia. Like most contractors, Boone dealt with his share of reluctant payers, including the custom builder in question here.
"He would agree to meetings to settle the account,and then he'd renege. He just wouldn't show up. I even went to his house at the times he'd arranged, but he wouldn't be there. I finally decided I'd just track him down and demand my money," says Boone.
"One night I saw him driving around and I ended up chasing him at a pretty high speed. My wife was with me and she was yelling, 'You're going to get us killed,' but I wasn't going to let him slip away again. When we got in the development where he lived, I lost him, so I backed up into the woods near his house to wait and watch. If I had to stay there all night I would. Eventually he came driving by in his fancy Cadillac with his lights out and pulled into the driveway of his house — a $6 million home.
"So, I drove up behind him in the driveway, blocking him in. I got out and said, 'You owe me $10,000 and I'd appreciate a check right now.' His wife came out and asked what was going on. I said, 'Your husband owes me $10,000 and I'm trying to collect it.' I asked him right there in front of her if he was satisfied with the work I did and he said he was, but he couldn't pay me right then. He promised he'd get me a check the next day and I said I'd come by to collect it. Of course he wasn't there like he promised, and I continued to get the run-around, so I ended up getting together with 22 other subcontractors he owed money to.
"We hired a lawyer and all agreed we wouldn't take a penny less than what he owed us. It took us awhile, but we eventually forced him into involuntary bankruptcy and forced the sale of his house. We all got 100 percent of the money he owed us."
An ounce of prevention
There are at least two lessons to be learned from this episode. The first, of course, is that tenacity pays off. The second is that once an invoice becomes an overdue bill, you're going to spend a lot of time chasing down money — time that could be better spent installing floors.
Boone says it doesn't make sense to expend that much energy and time on every customer, so the real key to getting paid is to qualify customers up front and then document every stage of the process so there is little or no room for disagreement later about payment.
In fact, says Boone, the contract itself should spell out not only what the job will cost, but also when payment is due.
Following the lead of general contractors and other building subcontractors, many wood flooring installers now employ what's commonly called a "draw system," requiring that the customer pay a portion of the cost of the contract at designated stages of completion. Typically, the draw will be one-third up front, one third after installation and one-third after sanding and finishing (following final inspection).
Bob Bailey of Artisan Wood Floors in Austin, Texas, says his 27-year old company has always required a draw system in its contracts with customers — 50 percent of the contract price up front, 25 percent after installation and the remainder after sanding and finishing. The 50 percent upfront covers at least the cost of materials, and work on sanding and finishing doesn't begin until the installation labor costs have been paid for.
"That way," Bailey says, "the most weever lose out-of-pocket is the labor cost of installing or sanding and finishing."
Jack Campbell of Campbell & Company Construction, a custom home builder in Novato, Calif., says "that's the ideal situation" for general contractors and subcontractors alike. "That way you're at least getting your material costs paid for. You might get beat out of labor costs sometimes, but you can survive that. You can't take too many hits on material costs without going out of business."
The problem for subcontractors working for a tract-home builder, says Campbell, is that the builder is generally working on speculation and can't afford to pay subcontractors until the homes are sold. Also, because of the amount of contract work he has to dangle in front of subcontractors, a tract-home builder is in a position to dictate terms. If you insist on a draw up front, he'll find a flooring contractor willing to wait for the money. The solution in those cases, Campbell says, is to qualify the customer — to only work for builders who have a history and reputation for making money and paying their bills.
"If the general contractor takes a bath on a project, you're not going to get paid either," he says. "And especially with a new guy, you're gambling if you don't get some money up front. It's a tough situation for a wood flooring subcontractor, because so much of the cost is tied up in materials. Electricians and plumbers, for example, have more of their money tied up in labor."
While builders may be more resistant to draws than home owners, builders are more vulnerable to other tactics if a bill goes unpaid. One of the best collection weapons a subcontractor has is a mechanic's lien, which allows a subcontractor to place a lien on the customer's (or builder's) property until the debt is settled. Liens tend to work more effectively on builders than they do on home owners, who may not be planning to sell their house anytime soon.
"The general contractor is the perfect guy to lien, because he can't sell the property if it's liened," says Campbell. "You have some leverage with him."
Early intervention
Whether you use a mechanic's lien or some other collection method, the best advice is to act quickly. The longer a debt goes unpaid, the harder it's going to be for you to collect it.
"Know the warning signs," says Boone. These include broken promises to pay or customers who repeatedly dodge your efforts to contact them or meet with them.
"When that happens, double up your contacts with the customer to try to collect the money. Don't file a lien unless you have to, because when you do, it's going to make them mad," Boone says," but if you're going to do it, do it as quickly as possible."
It's best for everyone if you can collect the money without resorting to legal tactics. Bailey says his company typically expects to collect the final draw on the spot, as soon as the final inspection is completed to the customer's satisfaction.
"The day after the job is completed, we have a walk-though with the customer. That's a chance for the customer to register any complaints. If the customer is happy with the work, we ask for the check," Bailey says.
Boone agrees with that and notes that when he started out in the business, his father — Jacksonville, Fla., contractor Joe Boone Sr. — told him not to bother coming back from a job if he didn't have a check in hand.
Boone, Bailey and Campbell also agree that the best advice is to establish a relationship early on and then work with the customer throughout the project to ensure that problems — perceived or real— are dealt with. Customers who are repeatedly asked whether they are happy with the work — and who say they are — have no basis for withholding payment later, says Boone.
"Even if you do everything right, there's a chance you won't get paid once in awhile," says Bailey, "but most of the time you will. A lot of the times when contractors have problems getting paid, there's a reason for it."
"It's the nature of the beast," says Campbell. "Building contractors and subcontractors are good at what we do, but sometimes we don't know how to get along with people.
"If you communicate everything to the customer from the beginning, maintain a positive attitude, conduct yourself as a professional and build a good relationship,most of the time you'll be able to collect your money without any problem."
Won't Pay Up? Lien on Them
In most states, wood flooring contractors can file a lien — usually referred to as a mechanic’s lien — against the property of home owners or builders who refuse to pay for contracted work. That may not mean you’ll get paid, but it gives you a fair amount of leverage.
The ability to file a lien against a customer’s property starts with a legally enforceable contract, and in many states the contract should specify the flooring contractor’s lien rights. In some states, it may also be necessary to file a preliminary notice to preserve your right to file a lien at a later time.
Lien rights and requirements vary from state to state, so take the time to research the lien laws in any state where you plan to do business. Your company attorney should be able to provide that information, but there are a variety of resources available at your local library or on the Internet. There’s also a detailed discussion of lien laws in “Lien Law 101,” April/May 1997 Hardwood Floors.
Among the details you’ll want to identify: Are mechanic’s liens in your state “inchoate,” meaning that the lien predates most other liens and therefore remains viable even in the event of bankruptcy or foreclosure? You’ll also need to know the deadline for filing a lien — often 90 days from the last time work was performed on the job — and the procedures for properly filing the lien.
The National Association of Credit Management web site features a “Useful Sites” page that provides links to other Web sites, including several related to lien laws (Under the “Building and Construction Industry” heading). The site also includes a series of articles on mechanic’s lien laws in various states. Go to www.nacm.org/bcmag/bcarchives/bcarchives.html, and search for “mechanic’s liens.”
Collect Calls
Contacting overdue accounts by telephone will tell you quickly whether you can expect to be paid soon or if you need to take more aggressive action. Here’s a simple action plan:
1: Make sure you’re talking to the person responsible for paying the bill. You should already know who this is, so ask for that person and get a firm answer that you are in fact speaking to that person.
2: Communicate the purpose of the call. Identify yourself and your company, then start with a direct, non-threatening statement, such as, “As you know, you have a small balance of (amount) due on your account with us,” then pause. The “as you know” is a good way to get agreement that he or she does owe you the money. When the customer answers, listen carefully and take notes. Make surethe facts are right.
3. Offer a choice. The choice is between paying soon or paying sooner. You can say something like, “When can I expect your check — tomorrow or Friday?”
4. Nail down a promise. This reaffirms the customer’s choice of when (not if) to pay. If the customer gives a vague answer such as “I’ll be in sometime next week to settle this account,” follow up by saying, “Can I count on you having the money in by Wednesday?” Don’t let the customer off until you have a specific promise.
5. Follow up promptly. Keep a daily file of when people promise to pay. If they don’t pay on the promised day, follow up with another phone call. Your prompt follow-up lets them know you mean business, and they will realize that this is one bill that can’t be put off forever.
Resources
- The National Association of Credit Management, 8840 Columbia 100 Parkway, Columbia, MD 21045-2158. Phone: 410/740-5560. Fax: 410/740-5574. E-mail: [email protected]. The NACM also has a Web site that offers a number of resources, including a “Useful Sites” page that provides links to other related Web sites.
- Collections World: The online resource for credit & collections professionals, includes an online version of Collections & Credit Risk magazine, published by Faulkner & Gray Inc., 11 Penn Plaza, New York, NY, 10001; phone 212/967-7000.
- Associated Credit Bureaus, 1090 Vermont Ave. N.W. Suite 200 Washington D.C. 20005; phone 202/371-0910.