In this Article…
- Learn why a customer may be refusing to pay for work done.
- And learn the steps to take when a customer refuses payment.
Disclaimer: The information provided in this article is for educational purposes only and should not be considered legal advice. For any legal concerns or questions regarding construction, please consult a qualified legal professional.
Slow payments are an unfortunate reality of the construction industry. As many as “82% of contractors report waiting over 30 days for payment,” according to this "Construction Payments Report." Often, payment delays can be attributed to inefficient payment processing and mismanaged cash flow. However, there’s another situation that may not only delay payment to you, but could stop payment cold. That is when a customer of yours is refusing to pay for work you’ve done.
When a customer refuses to pay for construction work you’ve already done, it could:
- Cause delays to other projects you’re working on.
- Create cash flow problems for your business.
- Strain relationships between you and your customers, as well as subcontractors and suppliers.
- Damage your business’ reputation.
To start this article, let’s discuss the common reasons that may cause customers to refuse payment.
Why a Customer is Refusing to Pay for Work Done
Be aware of your rights and obligations as a general contractor under relevant laws. In the state of Pennsylvania, one such law is the “Contractor and Subcontractor Payment Act.”
Knowing the reasons why a customer may refuse to pay for work you’ve done can help in two ways:
- Having the knowledge to prevent such a situation from ever happening to your business.
- Provide you with the information needed to remedy such a situation quickly.
Here are some common causes of customers refusing to pay:
1. Dissatisfaction with Work Quality
Customers may refuse payment to you if they believe the work you’ve completed does not meet your agreed-upon standards. This dissatisfaction in work quality can often be the result of:
- Miscommunication about expectations.
- Lack of clarity in project specifications.
Example Scenario #1:
- You’ve just finished building a new deck for a homeowner.
- The homeowner is doing a final walkthrough inspection and is not happy.
- The Problem: The homeowner says he was OK with composite decking materials for the foundation, however, he expected traditional wood decking for the surface.
- Flashback: The homeowner did not state this request before the project started.
- You used composite planks for the deck’s surface to ensure it lasts against weather and insect damage.
- Now the homeowner won’t pay because the work isn’t what he expected it to be.
2. Misunderstandings
Confusion between you and a customer regarding contract terms, project scope, or timelines can also lead to disputes.
Example Scenario #2:
- A homeowner wanted you to build a deck made entirely of traditional wood–no composite materials at all.
- You’ve completed the project on-time and on-budget, and using traditional wood, as requested.
- The Problem: On the final walkthrough with the homeowner, he asks why the wood planks haven’t been treated with stain and sealant.
- Flashback: Before starting the deck, you informed the homeowner that the project scope only included your construction of the deck. Any painting, stain, or sealant would have to be completed by a painting contractor, which the homeowner would hire.
- Now the homeowner says he had expected you to stain and seal the deck’s surface. He won’t pay, or pay more than the price you quoted, until you finish the deck’s surface.
3. Emotional Responses
Clients can react emotionally to perceived issues that may not be your fault.
Example Scenario #3:
- You’ve built a new deck for an elderly couple and they were happy at first.
- However, before they paid their invoice in full, the husband helped his wife, who has difficulties with walking, out of their house and onto the new deck. Unfortunately, the wife couldn’t make it across the deck because she feared that she might fall.
- Flashback: During construction, you kept in mind that the customer’s wife has difficulties walking and that the new deck was so she could enjoy the outdoors more.
- You ensured that everything about your construction was up to code, that there was easy access to the deck from the house, and you ensured that all of the planks were level and flush.
- The Problem: Despite your considerations and build quality, the homeowner is blaming your work for his wife’s mobility issues, and refuses to pay.
- His response may actually be due to his disappointment and fear about his wife, rather than your work.
4. Trust Issues
Any previous disputes or bad experiences that customers may have had with your business or other contractors can cloud their trust of you.
Example Scenario #4:
- The homeowner who has hired you to build the new deck for them had worked with another contractor on a different project–an addition to his house.
- Upon completion of that addition, the homeowner had discovered that the contractor overcharged him for removing and disposing of the construction waste they produced.
- The Problem: Now the homeowner is scrutinizing everything you do and questioning every charge on your invoices.
- This slows payment, and if they suspect any overcharging or issues, they may stop payment to you all together.
No contractor wants to be in any of these situations, but they happen. What can you do? There are steps you can take…
Steps to Take When a Customer Refuses Payment for Work Done
Be proactive and do everything you can to prevent customer disputes from happening in the first place. Written contracts, upfront deposits, and streamlined payment processing are effective ways to avoid dispute-related payment issues.
- Written contracts should define the scope of work, payments terms, change order procedures, dispute resolution clauses, and termination conditions.
- Upfront deposits can cover initial project costs and reinforce client commitment. The standard deposit range is 10% to 30%.
- Streamlined payment processing like that offered by Truss Payments make client payments easier and timelier, as well as enhance client trust thanks to robust security features.
It’s your worst nightmare as a contractor: a customer is refusing to pay for work that you’ve done. You need the payment to manage your business’ cash flow, pay your workers and suppliers, and to put food on the table. To navigate a construction dispute, here are the steps at your disposal:
Step 1: Communicate to the customer early, clearly, and professionally.
When faced with a customer refusing to pay for work you’ve done, the first step is to initiate informal communication. This approach allows you to clarify misunderstandings and address concerns directly, often preventing the issue from escalating further.
Here are some practical tips for communicating with clients about payments:
1. Reach out early
Don’t wait; stay ahead of the issue and establish a dialogue with your customer via a phone call, email, or in person.This openness and personal touch can break down barriers and foster cooperation between you and the customer. Use the opportunity to express your desire to understand their concerns and find a resolution.
2. Use soft language
Choose words that convey your empathy, understanding, and professionalism. Use phrases like, "I understand your concerns," or, "Let’s work together to resolve this," with sincerity to create a collaborative environment rather than a confrontational one.
3. Maintain a calm tone
Stay composed, even if tensions run high. A calm voice helps ease anxiety and opens lines of communication. Again, it’s about professionalism.
4. Listen to your customer
Show genuine interest in what your customer has to say. Rephrase their concerns to demonstrate your understanding. This technique reassures clients that their opinions matter and that you get them.
5. Avoid blame
Don’t waste your time on assigning fault and instead focus on resolving the customer’s issue. Saying, “You didn’t pay” isn’t going to get anywhere. Instead, try something like, “Let’s discuss what might have caused this delay in payment.”
6. Clarify expectations
Ensure both you and your customer are on the same page regarding payment terms and project expectations. Misunderstandings, like those with the homeowner’s new deck, often stem from vague agreements.
Much of effective communication and conflict resolution has to do with emotional intelligence, a characteristic of a great leader.
Step 2: Offer solutions to your customer
Communicating with your customer and offering solutions to them go hand-in-hand. It helps both parties to find common ground and may lead to faster resolutions.
Two effective solutions you can try are:
1. Redoing work
If the quality of your work is in question, consider offering to redo specific aspects of the project. This demonstrates your commitment and may satisfy the client’s concerns.
For instance, for the homeowner who wanted traditional wood planks for the surface of their deck, perhaps you could offer to replace the surface. It will certainly delay the project and you may take a financial hit, but the customer will be satisfied with the project.
2. Discounts
You could propose a discount on the final amount for the project as an effective way to encourage quicker payment without devaluing your work.
Or, perhaps for the homeowner who wanted the surface of their deck treated with stain and sealant, you can subcontract that work to a company you trust and offer a discount to the customer. You may lose some money because you need to pay the subcontractor their going-rate, but you’ll maintain a positive relationship with your customer and release payment.
The goal is to offer options and solutions before having to move forward to the next, more-drastic steps.
Step 3: Document everything between you and your customer
When a customer refuses to pay for work done, creating a comprehensive paper trail is essential. In fact, you should have been keeping detailed documentation from the very early stages of the project.
Thorough documentation can be your strongest ally if a dispute arises or escalates with a customer. Such documentation can provide evidence and increase your chances of success in small claims court.
Ensure that you have these key documents:
- Emails: Retain all communications regarding project expectations, approvals, and any concerns raised. Emails provide a timeline of your discussions and decisions with customers.
- Contracts: Maintain a copy of the contract signed by both parties. This document outlines the terms agreed upon, including payment schedules and deliverables.
- Invoices: Maintain a record of all invoices sent using a payments platform like Truss. Invoices illustrate the amounts the customer owes and can help clarify any misunderstandings regarding payment.
Keep track of all of your business' outstanding and previously paid invoices, and give customers access to this information. Truss offers one convenient dashboard to do just this.
Step 4: Write a demand letter to your customer who is refusing to pay
Despite your best efforts, if you’ve been unable to communicate with a customer effectively and they don’t find any of your solutions acceptable, the next step is writing a demand letter.
Writing a demand letter might feel daunting, but it’s a vital tool in navigating construction disputes. Key components of a demand letter to a non-compliant customer include:
- The amount owed: Specify the total amount due to you. Breaking it down the costs associated with labor, materials, and any additional fees.
- The terms of service: Reference the original agreement between you and the customer. Outline the services you agreed upon and the services that you provided. This reinforces the position that you have fulfilled your contractual obligations.
- A response deadline: By providing a specific date for the customer’s reply, you emphasize the seriousness of the situation and encourage timely action.
When drafting a demand letter to a customer who is refusing to pay for work done, keep your tone assertive, yet respectful and professional. Also use clear language and avoid jargon that might confuse the customer. This letter is your final opportunity to offer solutions to fix the customer’s issues and is the customer’s final opportunity to release payment to you.
Step 5: Legal action as a last resort
You’ve done everything you possibly could:
- You communicated quickly with the customer who is refusing to pay.
- You offered them various solutions to remedy the situation.
- And you sent an assertive, but professional demand letter including all of the detailed documentation about your work.
All of this still isn’t enough. Your customer is still refusing to pay for the work you’ve done.
Now, you’ve arrived at the last and unfortunate resort: legal action. You have no other choice, but to take your customer and their dispute to small claims court.
To take this undesirable course of action, here are the steps:
1. Evaluate the situation
Ask yourself:
- Does the amount owed to me from the customer justify legal action?
- Is there really no other way I can solve this problem?
- Do I have the time for this? Filing paperwork? Going to court? Time is money.
- Would it be easier to keep trying to get the payment from the customer than going to court?
- Am I likely to win?
To be successful in small claims court, contractors need to:
- Show a valid contract existed between parties.
- Demonstrate that the work was completed according to the contract terms.
- Show that the client was aware of their payment obligations and refused to pay without a valid reason.
2. File a claim
If you believe the situation and amount owed to you justifies going to court–and that you’ll likely succeed–it’s time to file a claim.
Visit your local small claims court or its website to understand the filing process for your area. Ensure that you have the necessary documentation, including contracts, invoices, and correspondence with the client.
3. Attend court hearings
Again, evaluate whether all of this is worth it to you–including the various court hearings you must attend. Is the money owed to you worth this effort and time? If so, when you attend your court hearings, be prepared to present your case clearly and ensure you have all relevant documentation with you.
Key Takeaways
Delayed payments and disputes are an unsavory part of the construction industry. As a general contractor, you may be faced with a situation where a customer is refusing to pay for work you have done. To navigate this predicament, firstly, understand why a customer may be refusing to pay you. Then there are many steps you can take:
- Effective communication.
- Provide solutions to resolve the dispute.
- Thoroughly document everything.
- Craft a demand letter.
- Finally, as a last resort, bring a customer who is refusing to pay for work done to court.
Using Truss as your all-in-one banking solution can be an important asset in customer disputes by providing efficient tracking of invoices, integration with your accounting via QuickBooks, and an easy way to process payments. Get started today with Truss.
