How To Speed Up Payments In The Construction Industry
On average, slow or delayed payments add around 3% to construction projects’ general costs. That’s equal to an extra yearly bill of around $40 billion. Some of which may be your construction company’s money.
BDO’s construction industry experts have identified several strategies and solutions that can help overcome the challenges that often lead to payment delays. Some are accountancy-focused while others are technological.
Below are some of the ways that your company can help speed up payments.
Send preliminary notices to promote visibility
Many construction projects are affected by lack of visibility and overview. Large-scale projects with multiple hiring-tiers tend to exacerbate said problems. Property owners, lenders and general contractors are rarely in direct contact with all sub-tier contractors, and payments often become a trickle-down affair that passes through several steps before getting to a specific subcontractor or supplier.
The levels between top-tier organisations and sub-tier parties can sometimes lead to top-level parties being unaware of all sub-tier parties. In other words, the problem becomes: how does a property owner or general contractor ensure that a specific sub-subcontractor gets paid on time if they don’t know they are contracted to work on the project?
Sending a preliminary notice, also known as ‘notice to owner’ or ‘pre-lien notice’, can help both payer and payee. This document notifies all relevant top parties of what a sub-contractor will be doing on the project as well as payment due dates. It also serves to ensure that all relevant parties are aware of who is involved in the project. Both contractor and sub-contractors can help by integrating details regarding preliminary notices into the specifics of a contract. While some sub-contractors may find this approach a tad aggressive, research shows that most recipients (83%) find preliminary notices to be helpful.
Send the right kind of lien waiver with every invoice
While most construction industry professionals are familiar with lien waivers, they may be less aware of the fact that there are different types of waivers, which each have their strengths and drawbacks.
The four main types of waivers are:
- Partial conditional lien waiver: an agreement to waive rights to claim conditioned on receiving a specific part of the total payment.
- Partial unconditional lien waiver: not conditioned on clearance of a payment. If a specific payment is not cleared by a certain date, the client has waived their right to that specific partial payment.
- Final conditional lien waiver: conditional waiving of rights to a specific claim that is given upon receiving and clearing a final payment.
- Final unconditional lien waiver: an agreement to waive rights to a claim that is not conditioned on clearance of a final payment.
If the difference between the four types seems a bit unclear to you, don’t worry. The technical details could fill a whole article, but in this context, it may be good to know that your company accountant is a good source for a further explanation of the pros and cons of each.
For now, it is important to note that liens are a great way of ensuring timely payment for contractors and sub-contractors. Both should have clear rules and policies for how liens are sent/received and processed, as well as what types of liens to use.
The focus should generally be on using conditional lien waivers, which can be used before receiving payment. Make sure to use completed conditional liens instead of blank lien waivers, which tend to lead to a time-consuming back and forth of paperwork before payment can be completed.
Invoice early and follow up
To keep payments timely, it is a good idea to send invoices as soon as possible and follow up with a reminder once the payment deadline approaches. On larger construction projects with many sub-contractors, such reminders also serve to increase your visibility for top-level companies, as well as the likelihood of payments happening in a timely manner.
The fact that it takes a median of about 70 days to get paid can lead to challenges regarding working capital and is a weighty reason why early invoicing is a good idea.
When possible, it is advisable to send invoices and follow-ups electronically to speed up communication. Such invoices should include relevant documentation of work completed, required legal forms and documentation of compliance, etc.
If you prefer a more formal approach, use the preliminary notices and/or notices of intent discussed earlier in this article.
Use your Customer Relationship Management system
A robust technology platform can help minimise time spent on producing the documents and proof-of-work required to ensure speedier payments. Here, a good Customer Relationship Management (CRM) system is crucial.
CRM systems can store all interactions with clients, including invoices, job records, proof-of-work documentation and much more.
Proactive use of your CRM system can include setting up internal notices and automated processes that ensure that you contact customers in a timely manner with regards to invoices and other forms of documentation. It can also be set up to deliver notices on open invoices that should be paid.
Sending invoices with the help of CRM can also include adding proof of work completed. This can be documents or construction site photos or something else. Finally, the use of CRM can help maintain your overview of partial payments.
Create Real-time Estimates
Several software solutions can help you create an estimate that can be created on the spot, presented to a customer and electronically signed straight away. Perhaps more importantly, it also allows you to convert the estimate to a preliminary invoice.
Estimation software is also a more efficient, and often more accurate, way of creating estimates. At the same time, the estimations are more consistent and can be directly integrated with other software systems, such as customer relationship software and building management software. Another important system is the Building Information Management software that is increasingly used during both the planning and building stages of a construction project.
The integration and streamlining of data and documents between systems is a cornerstone in the future of construction. How and why construction companies need to improve their use of data is something that I have covered in a separate article on the BDO International Tech and Media Watch blog.
When estimates and invoices are electronic, it’s much easier to manage and track them. Even better is when they are integrated with your CRM platform. Having built-in invoice reporting allows you to track the status of all invoices and identify which ones need follow-up. By doing this, you’ll stay on top of outstanding invoices with ease, and you’ll keep invoices from going uncollected.
Keep Payments Simple - And Electronic
Problems processing invoices are more likely to arise if they are paper-based. As previously mentioned, the associated paperwork means that each invoice is a stack of documents. One error, such as missed detail or incorrect date can lead to delays – or even having to resubmit an invoice. The processing procedure will likely also be more laborious if you submit paper receipts.
In bullet points, the best way to mitigate these issues is to:
- Make receipts payable online
- Customise the payment process to suit the contractor/sub-contractor
- Accept different types of payments (bulk or recurring payments)
- Accept payments from any geographic location and/or electronic device
On smaller construction projects, one of the easiest ways to collect payment is by accepting credit cards. However, processing fees can be steep. Another option is using some of the mobile payment tools that can transfer payment directly to a subcontractor’s bank account.
Whatever payment method you choose, it is preferable to agree on it with the client when your contract is signed. Whichever option you choose, it will generally be better if they are electronic options, as they tend to streamline both payment and the associated paperwork.
Create Great Documentation
Every construction project is an ocean of paperwork. Contract agreements, Statement of Work, General and special conditions, bill of quantities, drawings, CSI outlines, construction schedules, cost overviews, insurances and work completed documentation are just the tip of the iceberg.
For payments, the documentation of work completed is a common reason for payment delays. Here, as in many other situations, both parties will easier be able to reach an agreement if the work, and work process, has been well-documented. This documentation can include timesheets that justify hours-billed, progress photos and documents from the construction site as well as documents from mid-level construction officials that sign off on the work and much more.
If said information has been gathered electronically throughout the construction process, it is easy to present it alongside your invoice, thereby minimising the time needed for a back and forth of documenting work has been carried out. Here, the ability to capture electronic signatures on key documents helps further speed up the process.
The same applies to many of the other processes and contractual agreements mentioned above. For example, concerning project plans, which can often be updated during a project’s lifespan. Working off of the wrong plans can result in costly delays, as well as even litigation to work out who has been at fault. Proper documentation gives greater visibility and makes it easier to avoid such issues.
Finally, it should be part of a contract negotiation to cover what kind of documentation should be produced when submitting an invoice.
Use Contractor Business Management Software
Today, many companies use Contractor Business Management (CBM) software platforms to run construction projects and sub-contracting processes. A CBM-system integrates most, or all, of the features and processes mentioned above in one single platform.
Most importantly, correctly implemented CBM systems offer control of documents, for information to be shared and accessed easily, streamlines risk assessments and improves the speed and quality of communication. Especially if used alongside other software systems, such as the ones discussed earlier in this article.
With mobile tools offering CRM, electronic estimates, invoicing, payments, and document management, you can make the process easier for your customers.
The overriding lesson here – and throughout the previous points covered – is that the right auditory and technological steps can help speed up payment processes and avoid issues that could otherwise delay payments.