Slow payments create many problems for construction companies. They reduce cash flow, undermine profitability, and shrink the working capital needed to fund current projects and other expenses related to day-to-day operations — any and all of which may lead to higher financing costs.

The good news is you don’t have to take the problem sitting down. By proactively addressing accounts receivable management, you may be able to better expedite payments and improve the financial stability of your construction business.

10 tips to consider

The following tips can lay the foundation, so to speak, of a solid approach to accounts receivable management:

1. Scrutinize project owners’ creditworthiness. Never sign on the dotted line unless you have some assurance of the owner’s ability to pay. A full credit check may not be necessary for every project. Small jobs, for example, typically present less risk. But be sure to gather some evidence of creditworthiness every time — and the larger the project, the stronger the evidence should be.
2. Where appropriate, learn about owners’ processes and procedures. Some project owners — such as for-profit companies, nonprofit organizations and government entities — have distinctive accounts payable processes that could affect payment timeliness. Before work begins, reach out to your contact to see whether there’s anything in particular you should know or can do to avoid delays.
3. Review the contract as work starts up. The terms of a contract also affect billing and payment. Examples include those stipulating project milestones, due dates, and required forms and documentation. You no doubt became familiar with these terms during contract negotiations. But review them with the job’s project manager and other pertinent parties when work begins so everyone knows what payment targets you’re aiming for.
4. Consider early payment incentives. You can, for example, provide a 2% “early bird discount” for payments received in 15 days instead of 30. Discounts obviously eat into your profits, so you’ll need to determine which is more valuable: prompt payment or full payment. The answer may differ depending on the owner or project.
5. Invoice for success. Develop a standard invoice format that includes key data points such as:

• Date invoice was created,
• Date(s) work was performed,
• Detailed descriptions of goods and services provided (including prices and quantities), and
• Clear, bolded statements about payment terms.

If your invoices aren’t well-designed and easy to read, you’re giving owners an excuse to delay payments. Similarly, don’t be surprised if owners are slow to pay if you drag your feet invoicing them in the first place. Doing so sends a message that time isn’t of the essence.

6. Offer multiple payment options. If you don’t already, expand the payment methods you accept. Most payors today expect to be able to use a credit card, Automated Clearing House (bank-to-bank payment) or, more so than ever, online platforms such as Zelle, Google or Apple Pay, PayPal, or Venmo.
7. Establish communication channels. Say an owner has a question about your invoice; do they know whom to contact? Assign a dedicated contact person for payment inquiries and establish strong procedures for quickly addressing them. Done right, you’ll reduce delays and boost owner satisfaction.
8. Follow up persistently. You’re well within your rights to contact owners when they’re late with payments. Establish sound procedures for sending reminders at regular intervals, generally starting at 30 days. Also, escalate the urgency of contact as time goes on — for instance, go from emails to phone calls.
9. Leverage legal protections. Federal and state laws can help protect your payment rights. For example, prompt payment laws may establish reasonable deadlines and impose penalties for noncompliance. Mechanics’ liens against property are another widely available legal remedy. Laws vary by state, so work with a qualified attorney to understand your legal rights and exercise them when necessary.
10. Take advantage of technology. There are many software products on the market that can help construction businesses excel at accounts receivable management. Today’s billing software standardizes invoices, improves accuracy of calculations, and aligns invoices with project milestones or due dates. The right software can also auto-send payment reminders, track payments and generate reports that help you identify problem areas.

Critical priority

Accounts receivable management for construction companies is a critical priority. Your CPA can help you identify, organize and analyze the key data involved.

The high cost of ineffective accounts receivable management

Taking the time to improve accounts receivable management can seem like a distraction to construction business owners who’d rather focus on winning jobs and turning a profit. That’s understandable, but recent research reveals the high cost of failing to do so.

For example, financial management software company Rabbet’s 2023 Construction Payments Report, an annual survey of general contractors and subcontractors, found that the estimated cost of slow payments approached 14% of total construction costs in 2023. The survey also revealed that:

• Nearly three-quarters of contractors suffered payment delays of more than 30 days in 2023, vs. 49% in 2022,
• The number of liens filed in 2023 surged by 141% compared to 2022, and slow payments were 17% more expensive, and
• The total cost to the construction industry of carrying the fees and costs of slow payments came to $273 billion in 2023.

Moreover, the survey found that slow payments didn’t only result in direct costs. More than half of respondent general contractors and 78% of respondent subcontractors reported that late payments had delayed or even stopped work in the previous 12 months.

The message is clear: Accounts receivable management is a high-stakes business function. Be sure your construction business is addressing it appropriately.

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