Industry News

What is a demand letter in construction, and how can I write one?

Kristen Frisa

When a contractor enters an agreement to provide building services, it comes with a good faith expectation that expedient payment will follow. Sometimes there are complicating factors that delay payments. When that happens, it can wreak havoc on the businesses involved and their relationships with one another. One of the steps a contractor can take to get paid and salvage those relationships is to send a demand letter.

A demand letter is a formal note asking for someone to hold up their end of an agreement. You can use it as a preliminary step before initiating a breach of contract case in court. You could write a demand letter when a contractor doesn’t come to finish your bathroom or abide by the agreed warranty on the completed work.

In many cases, construction businesses send demand letters for overdue payments, and that’s the type of demand letter this article will focus on.

What does a demand letter do?

When you complete a project or reach a predetermined payment milestone on a project, your business sends out an invoice for the completed work. Invoices often include payment terms, including the date you expect compensation for your work. If the cash never comes, your next step would be to send a demand letter.

Construction has been plagued by late payments, partly because of the complex relationships involved in any given project. General contractors may have to wait for developers to pay them before they can pay their subcontractors. Laborers, in turn, have separate agreements with the subcontractors who pay them.

To add an extra complication, the owner may depend on bank loans to pay the developer and set off the first payment domino.

To end some of the payment delays, the federal government and many states have created prompt payment legislation, which requires each entity to pay an invoice within a set number of days of receiving it. The laws help, but they require a bit of participation from you. If you don’t get paid on time, you may need to follow up with a little nudge to those companies with outstanding balances.

When should I write a demand letter?

You can use a demand letter in part of your collections arsenal whether you

  • haven’t received any payment on an invoice,
  • you received a check, but then the sender put a stop payment on it,
  • or the check bounced when you tried to cash it.

Think of a demand letter as your last straw before filing a claim in court. You can consider the notice a goodwill measure, as it provides the recipient a heads up before you take legal action on late payment. That goodwill might be enough to preserve some professional relationships - if it’s enough to encourage quick settlement, it could save everyone involved a lot of time and money.

How to write a demand letter

A demand letter is a formal business correspondence. It should include your full name, your business’ name, all your contact information, and the same details about the intended recipient.

Make a logical, fact-based argument as to why you should be paid. Your letter should include all the pertinent details about your work, the invoice you sent, and when you expected payment. Also include:

  • A demand for a specific amount of money
  • How the payment should be carried out (for example, in full or by incremental payment)
  • A reasonable deadline that gives the recipient enough time to examine their records to confirm that they owe you money and to gather the necessary funds
  • The consequences if you don’t receive the money (like the fact that you will take legal action)

Attach any documentation that proves the money is owed, like the contract, invoices, and proof the work is complete.

Send the letter by certified mail, and order a delivery receipt for your records. Keep a copy of the letter, too. If you have to take the matter to court, there should be no doubt about what you sent and when you sent it.

The Consequences of Late Payment

Late payments on your invoices can be catastrophic for your business. Since construction companies experience a constant flow of expenses, a delay in inbound cash can

  • Delay the rate at which you pay subcontractors, laborers, or suppliers, destroying relationships that keep your business running smoothly
  • Cost you extra interest payments on operating loans
  • Cause project slowdowns (which have their own associated costs)
  • Keep your accounting and payables staff busy chasing down money

While a demand letter can be a helpful tool to encourage payments, prompt payment on the original invoice is still the best-case scenario.

How can I avoid having to send a demand letter?

As much as we’d like to, we can’t control what other people do. Whether or not you get paid according to your invoices isn’t within your control.

However, the speed at which you are being paid may have a direct link to your accounts payable and invoicing practices. How serious are you about being paid promptly? Your correspondences with your clients should reflect that.

Here are some tips that can encourage your partners to pay up fast

  • Specify all relevant payment terms in the contract
  • Include specific details on invoices about when payment is due. Nothing ambiguous like “Net 14,” but rather terms like “payment due on” and the interest or fees that will accrue if the payment is late
  • Remove as many barriers to payment as you can. When you send a digital invoice with MazumaGo, you can include a hyperlink for payment directly in the invoice.
  • Followup often. MazumaGo lets you send payment reminders, so you can collect more of your in-arrears payments faster

A clear statement of your payment expectations can go a long way in encouraging quick payment. Payment that’s as easy as a couple of mouse clicks can help, too, like MazumaGo.

If you have to follow up with a demand letter, take an objective, business-like approach by detailing the work you did, the expected payment date, and the consequences if you don’t get paid. Sending a demand letter before taking legal action can save you a lot of time, money, and hassle and save some professional relationships in the process.

Ready to figure out how to make payments fast and easy for your clients? Find out how you can get started for free with MazumaGo today.