Business Tips

Construction Draw Schedule

How Contractors Can Avoid Late Payments

Payments in construction are notoriously slow to arrive, which challenges contractors, who often have to self-fund their projects while they wait. These days, with the economy tightening, concerns over slow responses to contractor invoicing are greater than ever.

Late payments are the bane of many construction contractors. But rather than spending time and energy chasing down payments once they’re late, it only makes sense to take a strategic approach so that your invoices get prioritized and processing isn’t delayed in the first place.

Below, we talk about creating robust payment applications, setting clear payment terms, and using tools like preliminary notices and lien waivers to put your invoice at the top of the stack.

The part that construction draw schedules play

A construction draw schedule is a construction payment plan, or payment schedule. A general contractor submits a draw schedule to the owner and/or lender on a project, with the major steps in a project broken out (this is called a “schedule of values”) and sometimes divided into smaller groups.

Based on the size of the project, there are differing amounts of draws—i.e. payments from a lender or owner, based on labor and material costs accrued—so that a contractor has the funds to keep working. A new home build, for example, might have five to seven draws. In any case, the contractor writes up a draw schedule in advance with plenty of detail, and the owner or lender agree on it in advance.

Therefore, a well-thought-out construction draw schedule is the necessary underpinning for well-timed and appropriately spaced payments as the project progresses.

Payment applications keep communication flowing

When a project reaches the end of one of its steps that was laid out in the draw schedule, it is up to the contractor or subcontractors to submit a payment application to the owner or project manager. Also known as a “pay app”, this is similar to an invoice for work performed, although it usually constitutes a fair amount of documentation.

Once the pay app is verified by the owner or PM, they submit the draw request to the lender, requesting the next cash payout to the contractor so the project can continue. The draw request is a bundle of documents showing proof of work performed and materials used—including the one or multiple pay apps, depending on the number of subs involved. According to Levelset, a draw approval process usually takes about seven business days.

Given that they are just one link in the chain, payment applications need to be prompt, thorough and accurate to keep things moving, and for the project manager or owner to feel comfortable enough with a draw request to submit to the lender. It’s essential that a pay app lay out details on the following:

  • The original contract amount
  • Any change orders
  • Vendor invoices that show what you owe suppliers
  • Stage and dates of work this payment app covers
  • Percentage of work completed
  • Total prior payments made

Common payment terms for contractors

Depending on the contract terms and your role, a project might allow for a simple invoicing procedure, or it might require a payment application. Either way, contractors can include an invoice and state their payment terms. Contractor invoicing usually expresses payment in terms of “Net D”, with ‘D’ representing the number of days at which the payment is due. A common payment term for contractors is “Net 30”, which means that the payment is due within 30 days of invoice receipt.

Sending an invoice Net 30—and clearly stating what penalties will be exacted in case of late payment—can help your ensure your invoice or pay app is prioritized. Note that any late payment terms should have been agreed on advance, in the contract. You can also offer an incentive for faster payment. For instance, an invoice can be designated “2/10 Net 30”, meaning that a 2% discount of the invoice total will be applied if payment is made within 10 days. Offering a small discount up front can be worth avoiding the expense and wasted time of chasing delayed payments.

In addition to stating clear payment terms, the simple “early bird gets the worm” rule applies to invoicing, also. It’s always better to invoice when projects are fresh and stakeholders remember who you are and what you did. This also puts the owed money into the “accounts receivable column” for your company, so you can start tracking it and follow up if need be.

Employing preliminary notices

Using preliminary notices, sometimes called pre-liens or NTOs, upfront is another method for getting paid faster. While a preliminary notice does protect your right to file a mechanic’s lien later, and therefore gets the attention of property owners, it is generally not seen as an adversarial step to send a preliminary notice. They add visibility and clarity to a project, and could even be seen as a way to protect upper-level stakeholders from a mechanic’s lien by affording them the opportunity to address any issues of missing payments now.

Some experts suggest yet another proactive step: Sending a lien waiver with your invoice. If it’s a conditional lien waiver, it protects the stakeholders and builds trust while also still covering you—the contractor—if payment is not made.

Clear communication and educating key parties on what is owed is the only way to get paid, and solid supporting information in invoices and payment applications is the only way for these documents to be effective.

Clear, automated records of all your labor hours and cost codes from a proven time and attendance software removes all of the doubt, and much of the hassle, from effective invoicing that will get you paid on time.