Getting paid for the work you do seems like it should be straightforward, but anyone who’s run a business knows it’s not always easy. Post-recession, it’s become more vital than ever for contractors to set up and enforce good policies to ensure they receive payment for the work they do.
“I am much more conscious of payment now,” said Gregg Swenson, co-owner of Swenson Heating and Air Conditioning Inc., Princeton, Minn.
And that mindset is the right one to have, according to Bill Kinnard, president and owner of Grandy & Associates.
“If anything, the need to be more diligent has only gotten more important,” Kinnard said. “On-time payments are a major problem for many contractors, both in service and retrofit departments, and it takes its toll on the company as a whole.”
Accepting Credit Cards
While the recession may be over, its effects continue to linger, especially when it comes to customers’ ability to pay contractors.
While his company started accepting credit cards about a year before the recession hit, Swenson said, back then it was still more common for customers to write a check.
During and since the recession, however, he said, “Accepting credit cards — being able to take Visa, Mastercard, Discover — became a much bigger factor.”
He continued, “I’d have people calling, and that’d be one of the first questions they asked: ‘Do you take credit cards?’ That was a big factor with the service work, and also with the installs.”
Swenson also noted, “The way people use money nowadays has changed in the last seven or eight years. They don’t use their checkbooks to write checks so much — they use their check card. I know I don’t carry a checkbook with me at all anymore, where I used to.”
According to Chris Leach, owner/HVAC consultant of L&H Dynamic Business Solutions LLC, this evolution in technology can benefit contractors. “Payment practices have changed primarily as technology has improved, allowing contractors to be much more efficient in the processing of payments and to do it at the point of sale, which is critical to ensuring timely payment,” he said.
But contractors have to take advantage of the technology, Kinnard noted. “As we work with contractors, I continue to be amazed at the number who do not accept credit cards,” he said. “Many customers want to pay with credit or debit cards, and not accepting them will only cost you money.”
Jim Pomroy, general manager of Gator Air Conditioning, Bradenton, Fla., agreed that accepting credit cards is an essential business practice. “There’s no reason not to accept credit cards. I know a lot of newer contractors will say the costs are too high,” Pomroy said. “But it’s a cost of doing business, and it just needs to be factored into your pricing.”
According to Pomroy, his company started accepting credit cards more than a decade ago, and added technology to be able to swipe cards in the field more than a year ago.
“The technicians have the ability to swipe the customer’s card right there in the field, so that kind of eliminates most of the excuses somebody might have for not paying,” Pomroy said, adding that the company uses the Square credit card reader system.
“Square is very simple and straightforward, and it’s easy to set a new tech up on it,” he continued, noting that it operates on any smartphone platform. Plus, he said he’s happy with Square’s flat-fee pricing, which enables customers to use Discover and American Express cards without incurring additional expenses.
Another advantage of accepting credit cards, according to Pomroy, is the ability to automatically charge the credit cards of customers in their maintenance agreement program. “You get away from asking for renewals and looking for payment for renewals,” he said. “It’s just a continuous, monthly thing.”
Financing also plays a more important role these days, since consumers do not have the savings and cash reserves they once did.
“According to the U.S. Census/IRS data published in December 2013, the average savings balance is $3,800,” Kinnard pointed out.
He continued, “Many of the systems contractors are selling cost much more than that. As a result, contractors need to provide solutions for their customers to be able to finance the systems they are purchasing.”
Swenson’s experience is proof of this. “We deal a lot with the higher-efficiency, higher-end furnaces,” he said. “Our add-on/replacement market is almost strictly the 96 percent two-stage, variable- or fully modulating furnaces. So, generally, an add-on/replacement furnace with an air conditioner is in the $8,000 mark, and there’s a lot of people that don’t have that in reserves nowadays.”
As a result, the financing Swenson’s company offers through GE Capital’s consumer program has allowed them to serve more customers. “That’s been a big factor, too. I see a lot more people who are financing versus paying cash or writing a check,” he said.
Pomroy also noted that his company offers financing and tries to make it easy for customers to apply for it. “We use some of the traditional financing — Wells Fargo and GE programs. We have a link right on our website where they can apply,” he said. “Oftentimes, if we’re scheduling an estimate, we ask if they’re going to be needing financing. We then send them to the website, so they can apply before we even get there.”
Another area where payment practices have changed dramatically since the recession is in new construction, according to Swenson. Prior to the recession, it was common in his area for homebuilders to pay mechanical subcontractors on closing. Essentially, he said, builders strong-armed the subs into carrying their costs until the house sold.
“So, from the time the house started until the time it was finished, we would float that cost,” he said. “We didn’t get paid a dime until closing.”
However, when the recession hit, this practice caused a lot of pain for the subcontractors, especially when many of the houses they had worked on, but hadn’t been paid for, went into foreclosure.
“We personally got hit for close to $500,000, even though we had pre-liens on the houses,” Swenson said. He explained that in Minnesota, only the first party to file foreclosure and those listed ahead of them in the lien (which typically included the bank, lumber yard, and cement contractor) would receive payment.
“A lot of subcontractors ended up getting stiffed on the billing,” he said. “It’s probably one of the biggest things that affected the subcontractors in our area.”
Today, Swenson said, he doesn’t know any subcontractors that will still float the cost of all their work until the house sells. When working with local builders, the current policy at Swenson Heating and Air Conditioning is to require 50 percent down and the balance upon completion.
With the national builders, Swenson said the practice is a little different, since they usually pay in three installments. “For easy math, let’s say the house had a $10,000 heating system,” he said. “You get paid $3,000 when you rough in the house. Then after you do the ductwork and furnace and everything else, you get paid the balance minus $1,000. Then, when you install the registers at the end, you get your final $1,000.”
He added, “The downfall is the first $3,000 on rough-in doesn’t cover the cost of materials. So the mechanical contractors still carry a fair amount of labor and materials there.”
Overall, though, Swenson said the payment practices in new construction are definitely better than they used to be. “If we had to carry everything like we did before, we wouldn’t be in business,” he said. “It went from being a really common practice, at least in our area, to almost nonexistent over that time frame. That’s a definite positive influence for us.”
For those contractors who still struggle with on-time payments, the best thing to do is define a collections policy, according to Kinnard.
“Many contractors have never sat down and thought about how they want to get paid,” he said. “One thing is for certain — if we don’t define the payment terms upfront before the work is started, the customer will define them when the work is done. And their terms will not be in our favor.”
Once a policy is defined, Leach advised contractors to make every employee aware of his or her role in collecting payment, and hold each person accountable.
“Collecting timely payments is a result of having thorough collection procedures that all employees must be diligent in enforcing at every level of your business,” he said.
At Gator Air Conditioning, Pomroy said the policy is simple. “The biggest thing we do is we have an understanding with our clients that we are a cash on delivery company. We make sure that the technicians in the field understand that they are not authorized to extend terms to anybody. So if they get into a situation where the particular client is looking for terms, they have to immediately stop and say, ‘First of all, I’m not authorized to do that — I have to call the office.’”
He added, “A lot of times, that stops people in their tracks right there, and they go ahead and pay.”
Overall, Pomroy said his collection philosophy is “to not have any receivables and make sure you’re paid up front.”
As a final reminder, Kinnard said, “Contractors need to remember that the products and services they provide are never worth more to the customer than at the time they are provided. The more time that goes by after the work is done, the less value the customer feels there is. Get paid at the time of service.”
SIDEBAR: Best Pracitices to Get Paid
As a consultant, Bill Kinnard is focused on helping HVAC contractors run profitable businesses. Here are some of the best practices he recommends for getting paid and being profitable.
For service calls: “Flat-rate or upfront pricing is the only way to run a profitable service department. It’s what allows you to charge what you need to in order to cover your cost of operation and still generate a reasonable profit. Flat-rate pricing also allows the technician to let the customer know what the charges will be before the repair is done. If you’re billing on a time-and-material basis, you are asking your customer to make a purchase without knowing what the cost will be. Sure, there may be a customer or two who will say they don’t want to spend that much money, and that’s OK. If they are not going to pay, I would rather find out before I do the work versus after.”
For add-on/replacement work: “Contractors need to get a deposit upfront on every job with full and final payment at the conclusion of the job. Where else can the customer go and get something that is 100 percent custom for them and not have to pay a deposit? (Yes, the system you are installing is 100 percent custom. Sure, you’re using off-the-shelf equipment, but the way you are tying it all together in the customer’s home is 100 percent custom.) Most often, we don’t get a deposit because we don’t ask for it. Most customers expect to have to pay a deposit, but if you don’t ask, you don’t get.”
SIDEBAR: Employee Roles for Collections
According to Chris Leach, owner, L&H Dynamic Business Solutions, every employee in an HVAC contracting business must perform his or her part in a good collections policy. Here are his recommendations for what employees should be trained to do.
Customer Care Representatives/Dispatchers: Explain upfront what the charges are going to be and ask how the customer intends on paying for those services once complete. In renter situations, determine who will be paying and secure payment in advance if it is going to be from a third party.
Technicians: Accept credit card payments in the field and process at the time of service. Debrief with the office after each call and report both the amount collected and form of payment.
Salespeople: Understand all of the paperwork requirements for financing and confirm the documents are signed by the customer prior to scheduling the work.
Installers: If financing paperwork has not been completed, complete it with the customer and return it to the office promptly for processing.
Publication date: 4/7/2014