Anyone working in the trades industry will know that payment processes and agreements often have the potential to go haywire. Executing expensive projects, such as solving plumbing issues, laying out new flooring, or wiring electrical lines can frequently result in contention when it comes to getting full payment from the customer — especially when these projects have a tendency to change in scope after work has begun. Everyone has their dream home or office in mind, and trade professionals have to realize those visions with respect to budget and time. With these variables in mind, it’s not surprising that many professionals have payment issues with clients.
Payment refusal can happen for a number of reasons. It could stem from dissatisfaction over a finished result, lack of necessary funds for the work, or in worse cases, scamming the trades professional. Assuming the maintenance worker did not deliver a subpar or incomplete product, there are few things more frustrating than putting time and effort into a project, only to be denied payment. Even if the skilled worker takes all the necessary steps and looks out for red flags, these situations still occur.
While payment refusals can be rectified in small claims court, only 50% of small claims court cases are filed by businesses, and this path can be costly, complicated and time-consuming. The key is to develop a reliable payments system. By having clear and transparent payment standards in place, tradespeople not only appear more professional, but it also solves the problem of collecting what's owed by non-paying customers.
Let’s take a look at some of the ways payment systems can help avoid payment refusal in the trades industry.
PRICING AND CHARGING THROUGH MILESTONES
It’s not uncommon for clients to think that since trades work is often paid with cash or check, the payment is to be made at the end of the project. Trades professionals can, and should, request that clients pay in stages or milestones.
With staged payments, the standard structure is to request a deposit at the beginning of the project, another when it is halfway finished, and the final fee upon completion of the work. This method deters scammers who plan on having the tradesperson complete a job and then refuse to pay. However, clients may also be skeptical of this system, as they keep an eye out for potential trades scammers who charge a large initial deposit and then run off with the cash. As such, it is recommended that the first payment stay below 30% of the total price. Then, it’s the contractor’s call whether the second or third be the largest.
Another strategy is to charge at each milestone in the project. Let’s say that the client wants to have new drywall installed, along with new shingles on their roof and soundproof window seals. Contractors can require that the client pay upon completion of each section of the project. One payment after the drywall, the second after the roofing work, and then the windows. This can be adapted to any project scale. It’s a useful tactic because if given completion dates for each milestone, the client will not be able to dispute that they don’t have the funds since they had plenty of notice beforehand. Milestone pricing can also be combined with staged payments for even more security.
REDUCING RISK WITH ESCROW
Upon hearing the word ‘escrow’, many people think of real estate and home ownership. However, escrow accounts can be used for all kinds of transactions, including person to person, B2B or large customer sales. An escrow service acts as a third-party holder of project funds, and it only releases the payments when both sides have met the terms of their agreement.
The main advantage of using an escrow service is that it protects the buyer and the seller, or in this case, the client and the tradesperson. If a dispute occurs, both parties are typically given arbitration support over a defined period. If no agreement is reached, the buyer is often reimbursed, minus the escrow fees. One downside, however, is that the sales experience can become more cumbersome. The sellers are required to explain and instruct buyers on why and how to direct their funds to a third-party escrow service.
In general, the longer and more expensive the project, the more insurance contractors will get from using an escrow service. Most escrow services these days operate exclusively online, though, so if getting paid in cash is preferred, the tradesperson will either have to find a local escrow service or forgo using escrow altogether.
BEST PRACTICES FOR COLLECTIONS AND PAYMENTS
It’s vital to follow best practices when it comes to payment collection. Contractors can make sure they’re rewarded for their work by communicating clearly with their clients and setting project standards before they begin.
For example, requiring clients to provide a credit history report is a fast and affordable way to get a better insight into who they choose to work with. It would also pay for them to provide multiple payment options such as cash, check, credit cards and contactless payments. When accepting deposits, trades professionals should always ensure that the deposit is cleared before beginning any project — especially checks, which are subject to bounce.
Furthermore, signed contracts that layout working terms and conditions will help greatly in the event of a lawsuit. These contracts should include a clearly defined late payment structure which outlines what actions will be taken and when. Most importantly, contractors should communicate to their clients upfront that sometimes projects develop in ways that require additional fees. It goes without saying that using this as an excuse to pile on additional fees while working on a renovation paints the tradesperson crooked and is a sure-fire way to kill their reputation, but by being honest and professional, they’ll attract clients of the same nature while protecting their work.
Here’s the deal. There will always be people who refuse to pay or try and change the terms after work has been completed, but trades professionals can mitigate against this by setting up proactive payment systems. Plus, using the strategies above makes boosts professionalism and deters dishonest clients — giving contractors the best bet for a smooth project.