In this Article…
Learn the six steps contractors like you can take to:
- Ensure quick payments to your subcontractors
- Strengthen your business relationships
- Streamline your workflow
As a general contractor, you want an efficient payment process for your subcontractors because it not only enhances your cash flow–and their’s–but it also strengthens your relationship with them.
However, even the best general contractors face common challenges to efficient payment processing. These challenges include delayed payments, miscommunication, and administrative burdens.
By taking the crucial steps outlined in this article, you can ensure timely payments to your subcontractors, maintain project momentum, and build business relationships.
Real-life Scenario
Let’s say you’re working on a new homebuild. You’ve got the construction under control. What you can’t do yourself, you’ve subcontracted out to workers you know and trust. However, there’s still the home’s landscaping. Landscaping isn’t your wheelhouse and you weren’t satisfied with the landscape subcontractor you worked with on your last project.
You’ve decided to choose a new company. You’ve heard great things about this landscape subcontractor, so you trust them, and aren’t worried about their ability to complete the job. But you want to:
- Ensure everything goes smoothly where payment is concerned.
- Ensure that you maintain your own great reputation.
That’s where the six steps of this article become crucial.
The Six Steps to Streamlining Subcontractor Payments for General Contractors
Step 1: Establish Clear Payment Terms
When setting payment terms, use a contract template that includes clear milestones and retainage conditions to avoid misunderstandings.
To get started on the right foot with this new landscape contractor, the first step to streamlining your payments to them is to establish clear payment terms.
Defining payment terms upfront is essential to avoid any potential disputes and ensure that you make timely payments to the landscaper.
Being clear in your agreement with the subcontractor not only sets the tone for your business relationship with them, but it minimizes misunderstandings that could derail project timelines, like scheduling issues about when work should be completed.
Here are the key elements to include in your payment terms with the landscaper or any subcontractors:
- Due Dates: Specify when you expect to make payments to the subcontractor. This helps them (and you) manage cash flow more effectively.
- Payment Methods: State what method of payment you will use (e.g., ACH transfers, checks, digital payment). Truss allows you to make payments right online.
- Conditions for Payment: Detail what must be completed, such as project milestones or submission of invoices, to initiate payment. For instance, just like any construction project, landscaping for a new house is often done in phases. Sprinkler systems may be installed early on in a project, while sod and plants may be the last things the landscaper will complete. Outline what phases of the project will trigger a payment from you.
- Additional Terms: Know whether you need to include elements like retainage and back charges in the contract terms with this landscape company.
Clear and concise payment terms support smooth financial transactions, while well-documented agreements serve as legal protection for both sides. With this foundation in place, you can move forward into the next steps of streamlining subcontractor payments.
Step 2: Utilize Online Billing and Payment Platforms
Since 82% of contractors surveyed in this “2024 Construction Payments Report” say that they wait more than 30 days to get paid, stand out from the competition using Truss Payments. Pay faster, and great subcontractors will be clamoring to work with you.
Digital payment platforms have transformed how business owners manage their invoicing and payments. If you haven’t utilized a digital payment platform yet to streamline your subcontractor payables, here are the benefits you’re missing:
- Faster Transaction Processing: Digital payment platforms eliminate delays associated with traditional methods. With Truss, subcontractors receive payments instantly, reducing financial strain for them while allowing general contractors greater control and a clearer picture of their finances. Nothing will solidify your stellar reputation as a general contractor with this new landscape company more than paying them on time.
- Reduced Paperwork: Automating billing processes minimizes the need for physical paperwork. This not only saves you and your team time, but also reduces the risk of errors associated with manual entries and the risks of paper checks.
- Increased Security: From bank-grade security to 256-bit SSL encryption, Truss offers general contractors unparalleled security.
To fully leverage these benefits for your business, an automated accounts payable (AP) process is crucial. This solid AP process keeps all systems running smoothly by quickly and accurately processing large amounts of data in various formats.
When searching for the best online payment platform for your contracting business, consider factors such as ease-of-use, integration capabilities, and customer support. This guide provides valuable insights into selecting an appropriate platform.
Did you know?
Relying on checks for payments can disrupt this smooth workflow. As highlighted in a Truss blog post, "checks ruin a productive schedule." This emphasizes the importance of adopting more efficient payment methods to save valuable time that could be better spent on core business activities. The faster you pay your landscaping subcontractor, the faster they can buy shrubs and trees and get them in the ground, and the faster your new homebuild will be done.
Step 3: Automate Payment Processes
Automating your payment processes is another way to ensure timely payments to subcontractors without the stress of having to remember.
Automating invoicing and payment processes is another crucial step for streamlining subcontractor payments for general contractors like you. The benefits are clear, and include:
- Reduction in Manual Errors: Automation reduces human errors in invoicing and payables. You’re busy, and so is your administrative team; mistakes happen. Remove some stress from their workload and automate your payment processes.
- Time Savings: Streamlined payments mean less time spent on administrative tasks, allowing you and your team to focus on core project activities, like getting the finishing touches on the new home’s landscaping and exterior.
- Timely Payments: Set schedules for payments to ensure subcontractors receive funds when expected, improving relationships and trust. Automation makes this as easy as pie.
Several tools can automate payments for general contractors, such as QuickBooks and Truss, which seamlessly integrate. This integration improves your workflow efficiency and allows you to sync financial data to maintain accurate records, all without manual entry.
Step 4: Track Payments and Deadlines Effectively
In addition to these three practices for payment tracking, it's also crucial to understand the legal aspects of construction payments, such as sending preliminary notices.
Since your landscape subcontractor is most likely going to complete their landscaping services in phases, it would be tough to remember when you made a payment to them, how much you paid, and when your next payment is due.
A robust payment tracking system ensures visibility into outstanding invoices and upcoming due dates. Here are some best practices for tracking payments and their deadlines:
1. Use a Centralized Tracking Tool
Implement software that consolidates all payment information in one place. This allows you to easily access the status of each invoice. Truss offers comprehensive features for payables (and receivables).
2. Create a Payment Schedule
Use your payment software to sync to the payment schedule in your agreement and terms. Share this schedule with your subcontractor to ensure everyone is aligned on expectations.
3. Regular Updates
Review your payment statuses on a weekly or bi-weekly basis. This practice helps identify any overdue payments, processing issues, or errors early, allowing for swift action.
Keeping an eye on payments serves multiple purposes besides keeping your money straight. It also mitigates potential disputes with subcontractors over late or missing payments and fosters trust and transparency in your relationships.
Step 5: Standardize Billing Documents Used in Subcontractor Payments
It’s never too early to get prepared for tax season. Use documents provided by the IRS to prepare for your taxes and remain compliant throughout the year.
Utilizing standardized documents throughout your project’s lifecycle can streamline processes greatly, while minimizing compliance issues. When subcontractors know exactly what is expected from you, payment cycles become smoother and more predictable.
If you don’t already have the following documents readily available, it’s essential that you do.
- W9 Form: Allows you to collect accurate taxpayer information upfront and helps avoid tax-related issues later.
- 1099 Form: This document is necessary for reporting payments made to your subcontractors and ensures that your business is compliant with IRS regulations.
- Pay Applications: In addition to you having proper documentation for payments, ensure that your subcontractors are submitting documents to you as well, such as pay applications with request for payment and information about project progress.
- Lien Waivers: Then, once a subcontractor submits a pay application and you’ve made a payment, utilize lien waivers to protect your business against future claims by confirming that you have paid a particular subcontractor.
By standardizing these documents, you make financial interactions transparent, enhance efficiency, and build lasting business relationships with subcontractors.
Step 6: Implement Software Solutions Specifically Designed for Payment Management in Construction Projects
Don’t go with just any payment software. Choose a platform that understands the business of construction, like Truss.
As we’ve discussed in step 2, utilizing online billing and payment platforms are important in today’s business environment. However, not all platforms are created equal. The construction industry has unique challenges and needs, requiring general contractors to find solutions specifically designed for payment management in construction projects.
Here are a few options for you to consider:
- Truss: Truss is the all-in-one banking solution for general contractors. It handles everything from invoices to payables to business checking.
- CoConstruct: This platform offers robust features for efficient invoice management and automated payments workflows.
- Procore: Known mostly for its comprehensive project management tools, Procore also streamlines payment processes by integrating invoicing and tracking functionalities.
- Buildertrend: This software provides a suite of tools that include automated payment reminders and easy access to billing documents, ensuring no payment is overlooked.
For a more in-depth review of software solutions for payments and cash flow, read this article on the best financial management software options for general contractors.
Takeaways
Following the six steps to streamlining subcontractor payments for general contractors is essential for improving cash flow, maintaining your reputation, and lessening stress related to administrative tasks. By implementing these best practices, you can expect:
- On-time payments, which will minimize disputes and build trust with your subcontractors.
- Increased efficiency of your business operations, freeing up your time to focus on important project tasks.
- Strengthened business relationships, fostering a collaborative work environment with subcontractors.
For the perfect partner as you navigate through these six critical steps to streamlining subcontractor payments, sign up for Truss or book a demo.
