How To Speed Up Payments In The Construction Industry

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:

1. Send preliminary notices to promote visibility

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.

2. Send the right kind of lien waiver with every invoice

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.

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. 

3. Invoice early and follow up

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.

4.  Use your Customer Relationship Management system

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.

5. 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.

6. Keep Payments Simple - And Electronic

Problems processing invoices are more likely to arise if they are paper-based. 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.

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

7. Create Great Documentation

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.

8. 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.

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.

*Adapted from BDO Global, written by Jakob Sand, click here to read the full article.