With 83 percent of contractors confessing they’ve been forced to file liens to collect late payments on construction projects, the delay of payments is a big issue in construction that’s wasting money and effort.
The effects of construction late payments across the industry are seen when contractors factor in financing costs related to them. Industry-wide, that’s a $40 billion expense, and it’s inflating project costs right at the start. There’s another cost when project participants file liens. If the matter goes to court, that’s a whole new set of expenses.
70 percent of surveyed contractors say they’d offer a discount for net 30 payments. However, for whatever reason, developers and owners haven’t widely embraced this $18 billion gift to their own bottom lines. So, what else might work?
Processing invoices too slowly leads to casual payments. If you don’t convey urgency, don’t expect your client to. Digital processes allow you to tie all the payment processing up in a neat package so delays get reduced. Banks know this—that’s why 25 of the big ones adopted the Real-Time Payments system in November 2017.
Digital processes allow you to tie all the payment processing up in a neat package so delays get reduced.
The very first transaction took just three seconds, compared to the hours or days similar ones had taken previously. This initiative, pushed by the federal government, began in 2013. It aimed in part to catch up with the rest of the world and to speed up business-to-business payments. The roll-out is a long one, taking until at least 2020, but businesses don’t have to wait.
Today, there are plenty of digital accounting and payment solutions. ExakTime, for example, offers job cost tracking so your billing accurately reflects your costs. The insight you gain gives you opportunities to improve productivity and make billing reflect the costs correctly. Questions and disputes are easily resolved when you can show how long each task took and, therefore, how much it cost.
Whenever you have to adjust bills, issue refunds or spend time figuring out billing errors, you’re adding costs to an already costly process. For digital systems, there is a setup and learning curve. Nevertheless, speeding up payments and ensuring billing is accurate will provide a hefty return on investment.
Offer payment options
Wire transfers, automated clearing house transactions, debit card transactions, credit card transactions, PayPal and other popular payment methods just make it more convenient for people to pay you. Some have more costs than others, but all these costs are deductible as business expenses.
Rather than incentivizing people to pay by the 30th day, it’s better to promote earlier payments; usually 10 days from the invoice date.
Offer payment incentives
Cash discounts of one or two percent are motivating for buyers of big-ticket items, but you need to make it worth your while. So, rather than incentivizing people to pay by the 30th day, it’s better to promote earlier payments; usually 10 days from the invoice date. In your terms section of your invoice, adding a “1% 10, Net 30” clause tells the buyer that if they pay in 10 days, they can reduce the bill by one percent. This is generally used to flush out cash flow, but it can also reward long-term customers at various stages of projects.
Simplify lien waivers
When you pay someone for a portion of the project, consider including a lien waiver for their signature. If your invoicing is digital then make your lien-waiver process digital as well. If the party has only completed a portion of the total work, then get a conditional waiver signed. When you automate the lien waiver process to work with the payment process, you remove an irritant and help to keep your waivers up-to-date.
Speed up approvals
Everything that requires approval ultimately affects payments. Unapproved substitutions on specifications lead to rework, further delaying billing for the original work. Unapproved change orders delay work as well as the billing for the work. Unapproved invoices don’t get sent out and thus don’t bring in any payments.
Speed up approvals by using project management software and digital labor tracking and payment solutions. By tying these together, you can make sure of approvals wherever they’re needed in the payment chain. As part of the system, you can use reminders to keep everybody informed about due dates on all approvals.
Finally, whether you are a general or a subcontractor, take a few minutes to protect your lien rights. Send a notice to whomever you’re working for informing them of your intention to place liens on the property for nonpayment in the event they default on the contract. Then, as soon as a payment goes delinquent, send them a notice that you are filing a lien.