The Difference Between Proactive and Reactive Debt Recovery 1

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Monday, March 30th, 2015
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I have often said that most contractors will not pay $100 to avoid a payment problem but will pay $1,000 to get out of one.

What I mean by this is that effective debt recovery relies in a major way on the contractor being proactive in managing those issues that you’ll be fighting about in three months’ time.  I thought it would be useful to compare the profiles of proactive contractors versus reactive contractors.

When I use the term proactive, I am generally referring to a contacting business that keeps good documentation, manages client communication well, relies less on oral arrangements, and chases payments without sitting on their hands for six months first. The reactive contractors are the opposite, with poor documentation and huge debts sitting idle for several months. These guys ‘react’ to payment problems, and do not put in the groundwork to avoid them.

So how do they compare?

Less Often vs. More Often

Proactive contractors spend a lot less time chasing money. The reason for this is because their clients cannot navigate around the fact that the documentation blocks non-payment. It’s pretty hard to argue that the variation was not approved when you’re staring at your own signature on the approval form. I know this is the case because I hear a lot less from these guys than others who do it all on the phone. The reactive contractor is often in a mad rush trying to recover amounts on every second contract, and suffers the same bouts of non-payment several times a year.

Good Evidence vs. No Evidence

The proactive contractor is good at committing the events of the project in writing at the time those events occurred. This is called ‘contemporaneous evidence’ and is the gold standard in documentation when it comes to a payment dispute. In this way, one can prove what was done when, and why. It is this kind of paperwork that can prove whether an item of work was requested, whether it was agreed as a variation, and if one party had made the other aware of various conditions or prices etc.

The reactive contractor has very little in writing and spends a long time describing the ‘he said she said’ history of the work. Of course that is very easy for non-payer to deny and they usually do. Ultimately, you have very little evidence to rely on in a dispute. These are the scenarios where the non-payer has 50 pages of documents and the contractor has an invoice and a couple of text messages. You can see for whom this spells disaster.

Lower Amounts vs. Higher Amounts

The proactive contractor is usually chasing less money as a percentage of the project value. This usually translates to one or two months of disputed work; perhaps up to 25 per cent of the value. It is the reactive contractor who is chasing the entire project value or at least 40 to 50 per cent of the contract value. This is made worse by the fact that they started the chase up to eight months after completing the work.

Financial Stress Levels – High vs. Low

Sadly, reactive contractors are often left battling to save their homes, going into additional overdraft, unable to sleep at night, and suddenly forced to run their claims because their lives literally depend upon it. It should not get to this point. The proactive contractors might take a hit to the cash flow but they can still run their other jobs, and don’t have the ‘farm’ on the line. If any reason prompts you to stop being reactive, then this is probably it.

The bottom line is that to become proactive requires change, and that is something many contractors are not good at even if they know they need to. But when you look at the cost and stress differences it is a compelling proposition. Over the years, I have seen numerous contractors eventually change how they operate and now run their businesses with less debtors, and less stress, and more discipline. Marketers will tell you that it is hard to sell the idea of prevention, but for those contractors who ‘get it,’ the benefits are well worth it.

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  1. This is one of the areas whereby a little bit of investment in time, organisation and good practices upfront saves a whole load of headaches and frustrations down the track.

    It is often said that the pain of discipline is better than the pain of regret. Certainly in terms of being a 'proactive' contractor as described above, this is certainly one of the areas where such a principal applies.