Well-managed construction projects are like finely tuned machines. Cash flow is the grease that keeps all those gears in working order. For many construction businesses, disaster strikes when late payments fudge up business cash flow, causing delays in project progress. How can you avoid late construction payments that jam up your cash flow and cause project delays?
Here we'll discuss the best payment management practices contractors can use to avoid delayed payments and keep construction projects running smoothly.
The state of things – what is the typical payment pattern in construction?
The construction industry has a problem with payment timelines. Many construction businesses report waiting over 60 days for payment on a submitted invoice. Without the funds to pay for laborers, contractors, equipment, and other costs, these payment delays could put the brakes on project progress.
What's the hold-up on payments in the construction industry?
A few potential trouble spots can hold up the payment process during a typical payment pattern in construction.
Contractor invoices can be a nightmare to put together – an office team may have to assemble payment applications from numerous data sets to come up with the information needed to create an invoice. Tracking all that information can lead to late, inaccurate, or incomplete invoices that an owner or general contractor refuses to pay.
Construction contracts often operate on a "pay when paid" clause. Pay when paid means that a general will hold off payment to subs and suppliers until it receives compensation from an owner. This clause can protect general contractors from shouldering all costs for a construction project out of their cash flow but can cause a cascading effect leading to further payment delays down the payment chain.
Outcomes get even worse when general contractors lack an adequate cash flow management plan. Even when the owner pays quickly, a general contractor who lacks the bank balance to cover its invoices can create project delays that hold up all the payments.
Although late payments are common in the construction industry, they are not a foregone conclusion. Here are some payment management strategies to avoid payment delays and keep your construction project moving.
How to avoid payment delays in your construction business
1. Create a winning contract
Get smart about the construction contract documents you sign. Construction contracts, and the payments they prescribe, can vary, and some may be better for your contracting business than others. Set payment terms that work for you, including whether you're entitled to monthly progress payments or milestone payments. Understand the protocols for requesting and receiving payments right from the outset.
2. Invoice well
Payments don't just fall from the sky unbidden. To expect compensation, a contractor must first ask in specific terms soon after the work's completion. Invoices should include key information like an invoice number, the full name and address of the sender and recipient of the funds, a description of construction work done, and a date.
Read the contract carefully to understand if you need to complete a pay application by gathering supporting documents to submit with an invoice to get paid in a timely manner and avoid late payment.
3. Follow up
Sending swift and specific invoices is an excellent first step to prompt payment, but it may not be enough. You may have to send a series of polite but direct payment request reminders to get your payment moving. Overdue invoices are likely to cost more to collect, and the odds of receiving payment dwindle as time goes by.
4. Make payment easy
A timely, detailed invoice will go a long way in making it easy for your clients to pay a payment request. But it can be even easier. Look at the barriers that may be in place that keep your client from paying your invoice.
They may have to haul out the checkbook, write the check and get it signed, stick a stamp on it, and send it in the mail.
The work to pay the bill may be prohibitive for your customers and cause further payment delay. Make it easy by adding a Truss payment request link to the invoice you send to your client via email. The checkout link takes customers to your custom-branded payment portal that shows all their past payments and outstanding amounts.
Customers can log in with their bank to pay the invoice straight from their account or pay via credit card. That's it. They don't need a Truss account, and as soon as they complete payment, the funds are available in your account.
How to cushion cash flow when payments are late
The tips above are mainly ideas to help prevent delays in accounts receivable. The following tip is to help keep your outgoing payments moving smoothly, too. Construction projects can suffer huge losses if they lack a solid cash flow plan. When the money runs out, contractors can't pay laborers, subs, suppliers, or equipment rentals, and all work grinds to a halt. This situation costs everybody big time.
A cash flow plan details when money is coming in and when it's due to go out. A project manager can strategize to avoid trouble-causing cash flow issues by laying it all out.
1. Pay bills strategically
Before paying an invoice, look at your cash flow management document for any big expenses that may be coming soon. Pay the bill when you have the liquidity to cover upcoming project costs to avoid cash flow problems.
2. Pay subs only for the work they've done
Subs sometimes try to jump the gun, requesting payment for work they still need to complete. Check all the details on the payment request, and keep open communication with field teams, so you're sure of what's completed before paying the bill.
3. Make a contingency plan
Plan what will happen if you're out of cash when a big project expense comes up. Even with the best cash flow plans in place, this can happen. Whether it's liquidating an asset, using credit, or taking cash out of your personal funds, you should have a plan in place for what to do to salvage your ongoing construction project.
Best practices to avoid delayed payment
In a perfect world, each of your clients would pay you on time, every time, with little effort from you. In reality, you may have to take steps to ensure the invoices you send get paid in a timely manner, and you pay your invoices just as quickly.
By sending complete, detailed, and timely invoices, making it easy for clients to pay you, and protecting your cash flow, you can do your part to avoid payment delays in your construction business.
Are you ready to set yourself up for fast, pain-free payments? Sign up with Truss for free!
