Construction Credit & Collections Policy Guide | Projul

Every contractor has a story about the job that went great until it was time to get paid. The work was solid, the client seemed happy, and then the invoice sat there collecting dust for 60, 90, even 120 days. If that sounds familiar, you are not alone. Cash flow problems are one of the top reasons construction companies fail, and most of those problems start with weak (or nonexistent) credit and collections policies.

This guide walks through everything you need to build a credit and collections system that actually works: setting clear payment terms, screening clients before you extend credit, writing collection letters that get results, knowing when to file a lien versus hiring a collection agency, and doing all of it without torching your reputation.

Setting Payment Terms That Protect Your Business

Payment terms are the foundation of your entire accounts receivable process. Get them right from the start, and you will spend a lot less time chasing money later.

Pick a standard and stick to it. Net 30 is the industry default for most commercial work, meaning the client has 30 calendar days from the invoice date to pay. For residential projects, progress payments tied to milestones (deposit, framing complete, rough-ins done, final walkthrough) are more common and usually smarter. You are not a bank, so do not let clients treat you like one.

Put terms in writing before the first shovel hits dirt. Your payment terms should appear in at least three places: your estimate or proposal, your signed contract, and every invoice you send. If a client claims they “did not know” about your terms, you want a paper trail that says otherwise. For more on building solid payment terms into your contracts, check our dedicated guide.

Require deposits on every job. For residential work, a 30-50% deposit is reasonable. For commercial projects, a mobilization payment of 10-20% is standard. This does two things: it funds your startup costs so you are not financing the project out of pocket, and it tests the client’s willingness to pay. If someone balks at a deposit, that tells you something important.

Build in late payment consequences. A 1.5% monthly finance charge on overdue balances is standard and legal in most states. More importantly, include a clause that lets you stop work if payment falls behind schedule. You do not want to be 80% done on a project with zero payments received.

Here is a simple payment terms framework for different project types:

• Small residential jobs (under $10K): 50% deposit, 50% on completion
• Mid-size residential ($10K-$50K): 30% deposit, progress payments at defined milestones, 10% on completion
• Large residential ($50K+): 20% deposit, monthly progress billing, 10% retainage released 30 days after completion
• Commercial projects: Per AIA pay application schedule, Net 30, with retainage per contract

Credit Applications: Screening Clients Before You Extend Credit

Here is the truth most contractors learn the hard way: the best time to avoid a collections problem is before you start the job. A credit application is your first line of defense, and if you are doing any work where you invoice after the fact (rather than collecting payment upfront), you need one.

Who needs to fill one out? Any new client who wants Net 30 or longer payment terms. Repeat clients with a solid payment history can skip it, but new relationships should always go through the process. Think of it like a job interview, but for the client’s wallet.

What to include on the application:

1. Legal business name, address, and contact info. Not just “Bob’s Construction” but the actual registered entity name. This matters if you ever need to file a lien or take legal action.
2. Tax ID or EIN. This confirms the business is real and gives you a way to run credit checks.
3. Bank references. Name of bank, account type, and a contact person. You want to verify they actually have accounts in good standing.
4. Three trade references. Other vendors or subcontractors who have extended credit to this client. Call every single one. Ask: “Did they pay on time? Would you extend credit to them again?”
5. Credit limit requested. Let them tell you how much credit they think they need. You will make the final decision based on your research.
6. Personal guaranty. For smaller companies or LLCs, this is critical. A personal guaranty means the owner is personally on the hook if the business does not pay. Without it, you might be chasing a shell company with no assets.
7. Authorization to verify information. A signed statement giving you permission to check credit reports and contact references.

How to evaluate the application. Start by calling the trade references. If two out of three say payment was slow, that is a red flag. Pull a business credit report through Dun & Bradstreet, Experian Business, or CreditSafe. Look at payment history trends, not just the score. A company that pays 15 days late consistently is a different risk than one with a judgment on file.

Set credit limits based on risk. A brand-new client with thin credit history might get a $5,000 limit to start. After six months of on-time payments, bump it up. A well-established GC with strong references might get $50,000 or more on day one. Match the limit to the risk.

Building a strong accounts receivable process starts with knowing who you are extending credit to. Do the homework upfront and save yourself headaches later.

Collection Letter Templates That Actually Get Results

When an invoice goes past due, your response needs to be prompt, professional, and escalating. Here is a four-stage letter sequence that moves from friendly reminder to serious consequences.

Stage 1: Friendly Reminder (7 days past due)

Subject: Friendly Reminder - Invoice #[NUMBER] Past Due

Hi [Name],

I wanted to reach out about Invoice #[NUMBER] for $[AMOUNT], which was due on [DATE]. I know things get busy, so this is just a friendly heads-up that this one has slipped past the due date.

If payment is already on the way, please disregard this note. Otherwise, could you let me know when we can expect it?

Thanks, [Your Name]

This first touch should feel like you are giving them the benefit of the doubt. Maybe the invoice got lost, maybe the check is in the mail. Keep it light.

Stage 2: Firm Follow-Up (30 days past due)

Subject: Second Notice - Invoice #[NUMBER] Now 30 Days Past Due

[Name],

I am following up regarding Invoice #[NUMBER] for $[AMOUNT], originally due on [DATE]. This balance is now 30 days past due.

Per our contract terms, a [X]% late fee has been applied. The current balance due is $[UPDATED AMOUNT].

Please remit payment within 10 business days or contact me to discuss a payment arrangement. We value our working relationship and want to resolve this quickly.

Regards, [Your Name]

At 30 days, the tone shifts. You are still professional, but the message is clear: this is not a suggestion.

Stage 3: Formal Demand (60 days past due)

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Subject: Formal Demand for Payment - Invoice #[NUMBER]

Dear [Name],

Despite previous notices, Invoice #[NUMBER] for $[AMOUNT] remains unpaid. This balance is now 60 days overdue.

This letter serves as formal demand for full payment within 15 calendar days of this notice. Failure to pay may result in suspension of current or future work, filing of a mechanics lien on the project property, and/or referral to our collections attorney.

We prefer to resolve this directly. If there is a dispute regarding the invoice, please contact me immediately so we can address it.

Sincerely, [Your Name]

Stage 4: Final Notice (90 days past due)

Subject: Final Notice Before Collections Action - Invoice #[NUMBER]

Dear [Name],

This is your final notice regarding the unpaid balance of $[AMOUNT] on Invoice #[NUMBER], now 90 days past due.

If full payment or a signed payment plan is not received within 10 calendar days, we will proceed with [filing a mechanics lien / referring this account to collections / pursuing legal remedies] without further notice.

[Your Name]

At this stage, do not bluff. If you say you are going to file a lien, file the lien. Empty threats destroy your credibility. For a deeper look at managing the entire collections process from start to finish, we have a separate walkthrough.

Mechanics Liens vs. Collection Agencies: When to Use Each

Once you have exhausted your internal collection efforts, you have two main tools left: mechanics liens and collection agencies. Each has its place, and the right choice depends on the specifics of your situation.

Mechanics Liens: Your Most Powerful Tool

A mechanics lien attaches a legal claim to the property where you performed work. The property cannot be sold or refinanced with a lien on it, which creates serious motivation for the owner to pay up. In most states, a mechanics lien takes priority over many other claims on the property.

When to use a lien:

• The balance is significant (generally $5,000+)
• You are within the filing deadline (varies by state, typically 60-120 days from last day of work)
• You sent all required preliminary notices
• You have solid documentation: signed contract, invoices, proof of work performed

When a lien will not work:

• You missed the filing deadline (this is the number one reason contractors lose lien rights)
• You did not send required preliminary notices
• The work was on public property (most states do not allow liens on government projects)
• There is a legitimate dispute about work quality

Lien laws vary wildly by state, and the deadlines are unforgiving. For a full breakdown of lien rights, timelines, and notice requirements, read our complete guide.

Collection Agencies: The Outsourced Approach

A collection agency takes over the recovery process for you. They handle the calls, letters, and negotiation. Most work on contingency, meaning they only get paid if they collect. Typical fees range from 25-50% of the recovered amount.

When to use a collection agency:

• The balance is too small to justify legal action (under $5,000)
• Lien rights have expired
• You do not have the time or staff to chase the debt yourself
• The client has moved on to other projects and you have no ongoing relationship

When to skip the agency:

• The balance is large enough to justify a lien or lawsuit
• You are still within your lien filing window
• The debt is disputed (agencies cannot resolve contract disputes)

Using both together. Many savvy contractors file a mechanics lien first (to preserve their rights) and then hire a collection agency or attorney to do the actual recovery work. The lien creates pressure; the agency applies it.

A note on attorneys. For balances over $20,000, consider a construction attorney instead of a collection agency. Attorneys can file liens, send demand letters with more legal weight, and pursue breach of contract claims. They cost more, but on larger amounts, the recovery rate is usually much higher.

Maintaining Client Relationships During Collections

This is where most contractors struggle. You want your money, but you also do not want to torch a relationship that could lead to future work or referrals. The good news: it is absolutely possible to collect what you are owed and keep the relationship intact. It just takes some discipline.

Separate the person from the invoice. The client who is not paying you might be dealing with their own cash flow crunch, a bank dragging its feet on a construction loan draw, or a dozen other problems that have nothing to do with your work. Until you have evidence otherwise, assume the delay is situational, not personal.

Always communicate in writing. Phone calls are fine for initial conversations, but follow up every call with an email summarizing what was discussed and agreed upon. This protects both parties and prevents the “I never said that” problem. Strong client communication habits are just as important during collections as they are during the project itself.

Offer payment plans proactively. If a client cannot pay $30,000 all at once, would you rather get $5,000 a month for six months or send the whole thing to a collection agency that takes 40%? Payment plans are almost always the better financial move. Put the plan in writing, include consequences for missed payments, and stick to it.

Know when to walk away. Some client relationships are not worth saving. If a client is abusive, dishonest, or has a pattern of stiffing contractors, collect your money and cut ties. You can learn more about recognizing when it is time to fire a construction client in our guide on that topic.

Keep emotions out of it. Collections is a business process, not a personal grudge match. Stick to facts, dates, amounts, and documentation. The moment you start sending angry texts or badmouthing a client publicly, you lose credibility and potentially expose yourself to legal liability.

Document everything. Every call, every email, every text, every payment received. If the situation escalates to legal action, your documentation is your ammunition. Contractors who keep organized records recover money at a much higher rate than those who rely on memory and handshakes.

Building a Credit and Collections Policy From Scratch

If you do not have a formal credit and collections policy yet, here is a step-by-step process to build one this week.

Step 1: Define your standard payment terms. Write down your default terms for each type of project you take on. Include deposit requirements, progress payment milestones, final payment timing, and late fee percentages.

Step 2: Create your credit application. Use the template outlined above. Print it, make it a PDF, or build it into your CRM. Every new client who wants to be invoiced rather than pay upfront fills this out. No exceptions.

Step 3: Build your collection letter sequence. Adapt the four-stage templates above with your company name, logo, and contact info. Save them as templates you can fire off quickly. The faster you respond to a late payment, the more likely you are to get paid.

Step 4: Set internal triggers and responsibilities. Decide who monitors aging invoices (you, your office manager, your bookkeeper) and what happens at each aging milestone. A good cash flow management system tracks these automatically so nothing falls through the cracks.

Step 5: Know your state’s lien laws. Research the preliminary notice requirements, filing deadlines, and enforcement procedures for every state where you work. Put these deadlines on your calendar. Missing a lien deadline by one day is the same as missing it by a year.

Step 6: Choose your escalation partners. Identify a construction attorney and a reputable collection agency before you need them. Trying to find these resources when you are already 90 days into a collections problem adds unnecessary stress and delay.

Step 7: Train your team. Everyone who interacts with clients should understand your payment terms and feel comfortable discussing them. Your project managers should know the basics of your collections process so they can flag warning signs early.

Step 8: Review and adjust quarterly. Look at your accounts receivable aging report every quarter. If you see the same problems repeating, tighten your credit screening or shorten your payment terms.

Try a live demo and see how Projul simplifies this for your team.

Getting paid is not a side task. It is the entire point of running a business. A solid credit and collections policy will not make every client pay on time, but it will dramatically reduce the money that slips through the cracks and give you a clear path to recovery when payments stall. Start building your policy today.