Recent economic trends have caused many contractors and other businesses to deal with accounts receivable issues. Five years ago, when the economy was better as a whole, there was less concern with enforcing a contractual right to payment because bills were being timely paid.
For those contractors dealing with collection issues, not much can be done to “squeeze blood from a turnip”—if your customer has no money, collection efforts are often futile.
But to best assure your ability to collect debts, a few steps can be taken at the contract stage and during your work to best assure your ability to collect.
As a litigation attorney, I can advise you that these are the circumstances that best allow me to collect debts owed to my clients:
- Clear and certain scope of work terms set forth within a signed contract, including signed change orders confirming any revisions to the scope of work or the contract price (don’t forget to make sure your home improvement contract meets the legal requirements of Business & Professions Code section 7159, otherwise collection will be even more difficult);
- Attorneys’ fees provisions in a contract that help you leverage payment short of incurring attorneys’ fees;
- Service charge provisions in a contract that further help you leverage payment of at least the principal balance owed;
- A regular pattern of invoicing—don’t hold back invoices, make sure you send them on a regular basis consistent with the payment schedule terms of your contract;
- If an invoice is not timely paid, write to your customer noting the non-payment and insist that your customer respond to either raise any concerns they have with the invoice or to confirm their obligation to pay—this will help prevent the customer from making up an excuse for non-payment down the road;
- Utilize a promissory note for those customers that acknowledge their payment obligation but cannot immediately pay; the promissory note will take away any defenses to payment that they have and will make a collection lawsuit much simpler, either in Small Claims Court or Superior Court.
No one likes to pay an attorney (including myself). However, the best and most practical use of an attorney’s time is to consult with an attorney in limited amounts of time on your collection issues and any other disputes that may arise. As soon as you identify an issue with a customer, contact your attorney, spend 5-15 minutes with the attorney, and make sure that you are taking the appropriate steps to best assure collection. After a few of these calls, you’ll be more comfortable handling repeating circumstances as they arrive. More importantly, you’ll find that the attorney’s guidance helps you collect debts yourself as efficiently as possible, whether before a lawsuit is necessary or on your own in Small Claims Court via a well-organized, easily supportable claim for payment.
David J. Barnier is a partner with the law firm of Barker Olmsted & Barnier. He is a member of various construction industry groups and assists his construction clients with collections, contract preparation, contract review, and all other aspects of a construction business. He can be reached at 619-682-4842 or at firstname.lastname@example.org.