Subcontractors tend to have a rough time within the small business world. More often than not, the owner of the project isn’t aware of their existence. When the time comes to collect a payment, it isn’t unusual for subcontractors to wait for lengthy periods to receive compensation.
5 Processes for Subcontractors to Get Paid on Time
However, there’s a lot that a subcontractor can do to ensure they receive timely payments before having to resort to such measures.
Here are 5 processes that will help you get paid on time when subcontracting on a job.
Get Everything in Writing
If there’s a single rule that all subcontractors must follow, it’s that you need to document everything.
It doesn’t matter who’s hiring you, whether it’s the project owner or a contractor, you need to document the scope of your work, performance deadlines, payment terms, and dispute handling measures.
In most cases, it’s a good idea to insert a clause that requests attorney fees and payment collection costs in case of a dispute. In some states such as Iowa, such clauses have to be present in the initial work contract for them to be enforceable.
When working on lengthy projects that have multiple deliverables tied to payments, always include a stop-work for late payment clause. Allow for your client to pay you after your due date but communicate your payment schedule to them.
Including such clauses immediately communicates to your clients that you know what you’re doing and are serious about your payment terms. Many subcontractors neglect these basics and assume that on-time payment is automatic. The result is lengthy waits and cash flow issues.
You can avoid these headaches by crafting foolproof contracts that put you on the right path from the beginning.
Include Penalties and Discounts
A good way to speed up the payment process is to include incentives for early payment and penalties for late payment.
Most subcontractors hesitate to include these terms. However, including them shows an understanding of how the payment process works on a higher level.
Most subcontractors work in cash-strapped industries where payment processing is a delicate process. Often, approvals need to flow through different departments, and it can take some time for checks to be released.
Offering an early payment discount is a good way to speed up the process. Even small discounts can get your clients to prioritize your invoices and release payments quickly.
If early payment discounts don’t do the trick, then charging penalties for late payment works as well. Make sure these penalties are detailed in your contract so that you can legally enforce them if payments are delayed for unacceptably long.
Record all Changes
It’s common for many subcontractors to be hired for a fixed scope and then find themselves working on more and more tasks. Work that isn’t documented in the original scope document is hard to collect payment for.
Make sure you have a thorough change documentation process that requires multiple sign-offs from the contractor and the owner’s side. You don’t want to get caught up in a dispute between the contractor and the owner in case one of them approves the scope extension, and another doesn’t.
A change documentation process will help you uncover such disputes ahead of time, and you won’t find yourself having completed the work and waiting to receive payment. In some states, you can consider an email exchange as good as a written order.
However, it’s best to document everything on paper and receive appropriate sign-offs.
Understand the Payment Process
Subcontractors are paid according to an intricate payment application process.
These processes exist because it allows clients to gather all invoices together at the same time and release payments. They can project their cash flow needs better and manage working capital.
Unfortunately, many subcontractors hobble themselves by not adhering to the payment processes and sending their invoices as they please. Often, payments are delayed simply because of a mismatch between the time when an invoice is sent and the payment schedule.
It also helps to automate your invoicing process as much as possible by using a list of blank invoice templates that make it easy for you to quickly fill in relevant information and send them away to your client.
Make sure you send your invoices within payment application windows to make sure they’re attended to on time. Tailor your payment schedules and incentives to these windows so that you increase your chances of being paid on time.
Give your clients as many options as possible to pay you. Allow them to pay you by check or online. Include payment links within all of your electronic invoices so that they don’t have to go around hunting for payment methods.
Send Preliminary Notices
This tip is mostly relevant for subcontractors working in the construction industry. Often, general contractors and owners aren’t aware of all the subcontractors that are working on their projects. Expecting to get paid when your client doesn’t even know that you exist is a bit unrealistic.
In some states, filing a preliminary notice is mandatory if you want to enforce your payment procedures in case of defaults. Aside from the legalities of the situation, it also announces your presence in a professional way to your clients and communicates that you know your rights.
Right Processes, Timely Payment
Collecting payment can be a headache for subcontractors. However, by following a fixed invoicing and collection process, you’ll increase your odds of getting paid on time.
If your payments are delayed, these processes will help you enforce your rights when the time comes as well.