How to Handle a Client's Refusal to Pay

If you’re a contractor who’s never been stiffed by a client for whom you’ve done work, pat yourself heartily on the back because, however infrequent, it happens. Two years ago the Utica, N.Y.-based website Topix.com invited a discussion on this subject and was swamped with enraged commentary from contractors. One contributor made the point that while there were “blacklists” of dishonest contractors via online outlets such as the Better Business Bureau, Angie’s List, etc., there was no such public listing of chiseling homeowners—those who regularly defray service providers, dodge bills, help themselves to nonexistent bargains, etc. As “letshearit” posted: “There needs to be a list of homeowners that warns contractors to stay away from the deadbeat … that have a history of not paying for services.”  

Don’t Go Bonkers

In fact, several such lists have been created, among them the website, ContractorsCustomers.com. But many contractors seem to be unaware of them. If you don’t subscribe or have access to one, the best way not to have the problem of payment withheld is to learn to recognize the type and to simply refuse the job. But intuitive signals are frequently misleading and what contractor has time to thoroughly vet every single client? The human mind is programmed to go on trust, and something like this can happen. And if it does, you will, if you’re like most people, be overwhelmed with rage. You’ve been had. Someone is deliberately throwing out the rules at a key stage of the game in order to take advantage of you. You can react by doing what British contractor Nigel Gray did, which was to use a sledgehammer to demolish the work for which he was owed—15,000 British pounds.

In the U.S., for some unpaid contractors, a similar recourse might be to stalk the client into paying or, in extreme cases, to sabotage the client’s car—neither of these being a good option. Stalking takes time and you place yourself in legal jeopardy for trespassing and sundry other charges, and you still don’t have your money. As for sabotaging vehicles, don’t even go there. Calm down and think it through. Derek Halpern at SocialTriggers.com points out that to be successful in collecting, you need to first figure out why the client isn’t paying. It may be that 1) they don’t have the money, 2) they’re dissatisfied, or 3) they simply chose to spend that money elsewhere. “Kill them with kindness,” Halpern advises. “You don’t want clients to slip into defensive mode.”

First Line of Defense

Deadbeats have left burn scars on the hands of many contractors. Once that’s happened, contractors find ways to ensure that the experience is not repeated. That involves building multiple lines of defense so that a client knows you have the will and the means (that is, documents), to collect if they choose for whatever reason to withhold payment.

First, get a deposit. How much is up to you, depending on your market, competitive conditions, average job size, etc. But the industry standard is one-third to a half of the job cost. State rules prevail here, so that in California, for instance, you can collect up to $1,000 before beginning work. It’s something. For larger jobs, collect progress payments as the work moves forward, that is, x amount of money paid when a certain stage of work is completed. Collecting deposits on every job and, for bigger projects, arranging progress payments, are standard industry practices. They’re especially important if your company is small, construction industry legal publisher Nolo says. “Progress payments … are helpful to contracting operations of all sizes, but especially [for] smaller businesses, to minimize the potential for a homeowner to refuse to pay after work has been done at your expense.”

These practices will ensure that you don’t place yourself in that most vulnerable of situations, that is, of having completed the work but having none of the money collected. Do that and you’re practically inviting the ethically challenged person to stiff you.

Second Line of Defense

But even deposits and progress payments are no guarantee that a client won’t pull a fast one and, at the end, suddenly decide not to pay what’s owed. You’ll figure that out when the check is past the payment-due date to the point where you’re forced to call and email, which is always unpleasant, especially when your calls aren’t returned and your email messages go ignored or are deleted. Sometimes this type of client will actually say, orally or in writing, that he or she is dissatisfied with the work and that’s the reason payment is being withheld. Or, as with Mr. Trump, will offer to “negotiate” for a lesser amount.

RELATED: Is Arbitration Right For You?

Whether or not that person has a history of stiffing service providers, they’ve likely calculated just how much hassle and expense is involved on your part in pursuing the matter. They’re betting that you’ll walk away, powerless to do anything. The next step will be legal action, and if it’s a small job without many details to bring into contention—a roof replacement, say—making two key documents part of your standard business practice and having these readily accessible will go far toward rendering a favorable judgment and collecting that unpaid balance, according to Entrepreneur. They are:

• A proposal with a detailed scope of work.

• A contract that includes the proviso stating that, in the event of a legal dispute, the homeowner, if found at fault, will pay all your legal fees.

So if your phone calls go unreturned and your emails are ignored, with these documents in hand, you will be able to “Send a certified letter, including the proposal, a copy of the original contract, and let them know that you are going to proceed with legal action,” says the article's author, Deborah Mitchell.

Not to Be Taken Lightly

According to free legal advice at Ask-a-Lawyer.com, going to court, some kind of court, is probably the only way you’re going to get your money. You can do it even if you have only an oral agreement, provided you can bring some documentation (such as time sheets proving when you were at the house). But it’s time-consuming, and, unless you go to small claims court, where you can represent yourself, it’s also costly. Even if the court rules in your favor and the client is required to pay not only the invoice but your legal fees as well, you may end up shelling out money for an attorney up front. So carefully consider the merits of your case: “You need to weigh what you feel you are owed,” advises the website, “vs. the quality of evidence or proof and also whether and to what degree there may be significant issues with work, before deciding whether or not to sue.”

In many states, small claims court—a state court—may well be the way to go. How small is small? That will depend on the state and the amount owed or in dispute, but according to Nolo’s “50 State Chart of Small Claims Court Dollar Limits,” it won’t exceed $10,000, no matter where you live. (Also, Nolo advises, check your state’s website for any rules or exclusions.) The big advantage of small claims is that it encourages self-representation. And if the client loses and fails to pay, traditional claims collection measures kick in, such as filing a lien against the property or garnishing wages. A downside is that many small claims courts will leave the collecting up to you, even if the court rules in your favor.

What you don’t want to do is to waste a lot of time and money and get nowhere. So if worse comes to worst, know when to quit and write it off as what Halpern calls a “business lesson.” And, he adds, “hope karma gets them in the long run. Honest people always win in the end.”