Wondering if you should send a demand letter on your job? For contractors, slow payment is a major problem. Thousands and thousands of contractors are sending emails and making phone calls to chase payment every day. Escalating that communication and sending a demand letter is an effective way to take the next step, and get money flowing. Here are 3 ways that demand letters help contractors get paid when confronted with a slow-paying job.
Contractors experiencing slow payment or other payment problems usually start ringing their customer’s phone, and they hear some version of “it’s coming soon.” There’s the infamous “the check is in the mail” excuse that happens in all industries. In construction, it’s common to reflect the delay onto someone else in the payment chain, such as the “we’re waiting on payment from the owner” excuse. Telephone calls to your customer are certainly prudent, but they can too easily be ignored, and there are times when you want to get more attention.
Demand letters command more attention than telephone calls and emails. The best way to get your nonpayment noticed is to send a formal demand letter. These act as an initial warning shot to show that not only are you aware of your rights but are willing to enforce them as well. In fact, there are a number of instances where the party may not even be fully aware of the nonpayment, particularly when dealing with larger projects or construction companies. By sending a demand letter, you eliminate the “I didn’t know I owed anything,” excuse.
Demand letters are especially helpful on construction jobs because most projects (and payments) involve multiple stakeholders. It’s hard to make a collection conference call to all the different stakeholders. Demand letters, on the other hand, can easily be sent to your customer, the lender, the property owner, the general contractor, and others — all of whom will give your claim attention and start moving money!.
Demand letters can also create legal benefits for you. In many states, demand letters can be required to qualify for things like attorney fees, interest, and more. Great demand letters will incorporate components of your state’s prompt payment laws. Demand letters, in other words, can put the other parties on a clock to pay you, and this will influence people to cut your check.
Further, some states require that you send a warning and demand before taking any other legal steps. In some states, for example, you must send a demand before filing a lawsuit. In other states, you may need to send a certain type of demand before filing a mechanics lien, such as is the case with a “notice of intent to lien.” For a full breakdown on the differences, you can read this recent response in our Ask an Expert Center: Notice of Intent vs. Demand Letter. Even if a demand is not required in your state, there will still be some explaining to do in the courtroom when the judge realizes that a formal written demand hadn’t been sent.
Finally, demand letters serve as very useful evidence down the road about your claim in a way that phone calls don’t. If your claim for payment escalates and winds up in court, the “I kept calling them” line isn’t very helpful. A formal demand letter to the parties, or a string of them, is going to be very clear evidence that you made certain demands. This could make a big difference for your claim.
First and foremost, it’s important to be polite and professional when typing up your construction demand letter. There’s no need to get angry or confrontational. Put yourself in the receiving party’s shoes. The more adversarial the letter seems, the less likely they will be willing to pay. On the other hand, a thoughtful, concise, letter respectfully requesting payment has a much better chance of inducing payment. Of course, the level “aggression” can vary depending on the customer, the circumstances, and if demand has already been previously sent. We at Levelset have 3 levels: (1) friendly, (2) serious, and (3) threatening.
However, don’t confuse being “aggressive” with being impolite and unprofessional. Emotions can easily flare up between people whenever payments are in dispute or cash is being withheld…but resist all of those urges. Being professional, polite, and direct will serve you best in a demand letter. You want to resolve your dispute with the other party and move on. You don’t want to escalate your dispute into a full-on fight, and you certainly don’t want a judge or jury looking at a ridiculous and thoughtless demand letter as evidence down the road.
This letter should contain a short and concise account of the payment dispute. Be sure to state the events in chronological order, so it can be easily followed. Remember, that many times this is a prerequisite to a lawsuit. This will form the basis of your complaint. Include only facts, and describe them in as much detail as possible.
You should make the amount of money owed explicitly clear. Down to the penny. If you have a copy of the invoice or are citing the payment terms of the contract, include copies of those with your letter. It’s also good practice to show a willingness to work with the party as well by being open to the idea of a payment plan. However, don’t go too far! You may be willing to take a lesser amount, but there’s no reason to state that upfront.
Include an explanation of the consequences that will arise from litigation. This will cost them time, money, the dispute will be made public, and it could also have a negative impact on their credit score.
Also, if you have sent any previous demands for payment, mention them in the letter. These demands should act as a full account of all attempts to collect payment. That way, if the dispute does end up in court, you will be cast in a more favorable light as you went above and beyond to collect without filing a lawsuit.
It’s true that construction is one of the trickiest and slowest payment environments. Surprisingly, though, contractors have a ton of payment rights that put them in an extremely good collection position. It’s almost always required to summon those rights. The demand letter is a perfect opportunity for the contractor to start claiming these payment benefits. This will help you qualify for attorney fees, interest, late payment penalties, lien rights, and more.
Here are things you may want to consider putting into your demand letter. And you can refer to them all! No need to pick and choose. The best demand letters incorporate almost all of these items.
Almost every state has “prompt payment” laws requiring speedy payment to contractors. If a contractor isn’t paid within a certain period of time, these laws entitle the late-paid contractor to pretty attractive penalties, interest fees, and attorney fees. When used correctly, these rules can be extremely beneficial to contractors having payment trouble. You can see a great discussion of how prompt payment laws can come into play when looking to get paid in this question & answer on our expert center: How do I get paid in this situation? And view all prompt payment questions & answers here.
To qualify for all the prompt payment benefits, however, you may be required to specifically mention the prompt payment law in your demand letter!
A “demand letter” and a “notice of intent to lien” can be very different things in the context of a construction dispute. But, in many, many cases, you should consider combining these two concepts. If you’re unpaid on a construction project, your demand letter should almost always threaten to use your mechanics lien rights.
There are so many reasons why you should leverage the mechanic’s lien (or bond claim) rights when demanding payment on a job. Many of these are highlighted in this article on how mechanics liens work to get you paid. Bottom line here: Reference your mechanics lien rights in your demand letter, and note that you’ll be filing a lien if you remain unpaid on the job.
The construction contract is a complex beast of a document. Whenever anything comes up on a job — especially a payment situation — contractors need to be extremely careful. It’s become quite popular in the last 10-15 years that construction contracts have “Notice Provisions.”
Notice provisions within construction contracts require contractors to provide “notice” of any potential claims within a certain period of time after the claim arises. And the time period is usually very short. Such as 7-14 days. It’s very easy for time to slip by and for a contractor to lose all of their rights without even realizing it. The fairness of these provisions is very controversial. We wrote about a case a few years ago when a subcontractor lost out on $200k by missing this “notice window.” Yikes.
In your demand letter, you’ll want to cite any notice requirements in your construction contract. That way, the demand letter will serve as the proper “notice” you are required to provide.
The word “notice” is a nightmare in construction, by the way. There are so many notices. It’s easy to confuse them. Here is an article on all the different types of notices you may encounter on a construction job.
If you aren’t able to collect on an outstanding invoice, the IRS allows you to write it off as “uncollected debt.” When you report uncollected debt, the IRS treats it as “Debt Cancellation Income” for the party who failed to pay. More income means more taxes. If they don’t pay your invoice, your customer could be facing a massive, unexpected tax bill.
Download the free, customizable template: Final Notice Before IRS Reporting
After stating the specific amount that you expect to be paid, it’s time to set a timeframe for payment. A typical timeframe will be anywhere from 7-10 business days. The letter should state that if payment (or a payment plan) is not established by a certain due date, then the stated alternative actions will be taken to secure payment.
Once you’ve drafted your demand letter, make sure that it is as professional-looking as possible. Have someone proofread it to be sure there’s no errors or mistakes. Use your business’ letterhead. Print it out, sign it as you would a contract, and use your business letterhead. Better yet, if you’ve paid an attorney to draft up the letter, this can add an extra level of seriousness to your demand letter.
Documentation is everything at this point. Keep a copy of the letter for your own records. Attach it to the customer file, or create a new one to deal with the outstanding payment. Also, the letter should be sent by certified mail with return receipt requested. That can knock out the “I never received anything” excuse. The more evidence you have, the better.
Here are some common questions and concerns you may have when thinking about sending a demand letter to get paid.
You can use an attorney to send a demand letter, but you don’t need to. There are many situations when it makes perfect sense to send the demand letter yourself, especially at the start of any dispute. Sometimes, in fact, getting an attorney involved too early can overcomplicate the demand and make matters worse than they need to be.
We have a great discussion about when the time is right to get a construction lawyer involved with your dispute in this article: What does a construction attorney do, and when do I need one?
Sending a demand letter frequently gets a response, and frequently will solve your problem. It’s possible that you may not hear back from anyone and have trouble getting any response whatsoever.
The first thing to consider in this situation is whether you sent the demand letter to the right party, or to enough parties. Especially in the context of construction projects, there are usually many stakeholders relevant to your dispute. Make sure they all got a copy of the demand letter. This will increase the chances of you getting the response you need.
The second thing you’ll need to do, however, is escalating matters. If you aren’t getting a reply from your demand letter, it’s time to turn up the volume.
If the demand letter is returned, it could be due to a number of different reasons. The contact information you have could be wrong, they could have moved, or simply gone out of business. If this happens, it may be time to do some research on your own. If their proper contact information isn’t readily available contact the property owner, reach out to others working on the project, or do some public records research. Just be sure that the letter reaches the customer; especially if it’s required before a lawsuit can be filed.
Generally speaking, you want to keep your demand letter short and sweet. There are a few reasons why you want your demand letter to be pithy:
Whether you should make a settlement offer within your demand letter depends circumstance-by-circumstance. However, generally speaking, you should be careful to not “bid against yourself” in your demand letter. Especially the first demand. You don’t want to open negotiations by compromising your own position. There are exceptions to this, such as when you’ve already engaged in some negotiation, or when you are clearly going to be making some compromise on your claim for various reasons.
If you send the demand letter yourself the cost should be very low — practically free, in fact. If you use a collection agency or attorney to send a demand letter, the cost can be more significant. Some attorneys will send a demand letter for a flat fee of $100-$500, others will charge you hourly and require a full retainer. Likewise, collection agencies may offer demand letter services for a flat fee, but will also take your entire collection effort on a “contingency” basis.
If you’re sending your own demand letter you will not need to comply with the Fair Debt Collection Practices Act. Generally speaking, only third parties — like collection agencies — need to worry about the FDCPA. If you’re using a collection agency or some third party to send the letter on your behalf, then you should make sure that they will be following these rules. If they don’t follow the rules, this can complicate your claim and may require you to pay damages! However, if you’re sending the letter yourself (or using software like Levelset to send the letter yourself), then you don’t have anything to worry about.
You can use the below as a demand letter template. You can also generate and send a demand letter for free using Levelset here: Send your free demand letter in less than 60 seconds.
Date of Demand: ___/___/____
Your Company Name
Your Address
Your Telephone Number
Your Email
Reference:
The Project Name
The Project Address
To avoid further action, please make payment of $_______ by __/__/____
Sent To:
Name & Address of each person receiving the demand
Dear Sir or Madam:
Our records indicate that $____ remains unpaid on the above-referenced job. Your failure to make this payment has adversely impacted our business, and _________ will not go unpaid for its work on this project.
Consider this Demand for Payment as notice that we are exploring the recovery options available to us at this time. We would strongly prefer to resolve this dispute between the two of us, but if payment is not made immediately, we will have no choice but to pursue more adversarial options – including a mechanics lien claim or bond claim, as appropriate. Furthermore, please consider this as formal notice of a potential claim pursuant to any applicable contractual clauses, as well as a claim for the benefits under any applicable state and/or federal open account and prompt payment laws.
We hope that you will address this issue immediately and that further action will not be required. However, if necessary, our company is prepared to initiate a more formal recovery process. If your records indicate that the above payment has already been made, please contact us so we can resolve the discrepancy.
Signed:
__________
Your Name
Your title
Having to chase down payments is a two-fold struggle. Not only is cash flow negatively affected, but now also have to go through the hassle of hunting down the non-paying party. No one should have to do this, but its the unfortunate reality of the construction industry. For contractors, sending a demand letter should always be the first step in resolving any non-payments. They are a quick, cheap, and incredibly effective way to get you paid what you’ve earned.
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