Why late payments are stalling construction projects, and how to break the cycle

Seventy percent of general contractors and subcontractors consistently face late payments, costing the construction industry nearly 300 billion dollars last year. In today’s economy, GCs and subcontractors are already working on incredibly thin margins. Without cash coming in when planned, there is a ripple effect to their business, from a delay in purchasing materials to covering payroll to even forgoing bids on new projects.

The average payment cycle in the construction industry is 90 days, which is double the 45-day threshold that financial analysts consider a healthy business. This means that a contractor completing work in August won’t get paid until November. That’s an incredible operational risk, as fixed costs for a business such as rent and taxes are still due, even if customers have not paid.

Standardizing estimates

Creating detailed, standardized estimates will help minimize disputes before the bid is even accepted. A clear estimate ensures all parties involved are aware of the payment required, including specific terms and timelines.

An article on the U.S. Chamber of Commerce around late or non-paying customers says it best: “The best time to establish boundaries over late or nonpayments is before the work begins.”

By eliminating ambiguity with a standard invoice, GCs and subcontractors can reduce friction if disagreements arise, as well as build trust with clients through strong communication. The goal is also to hopefully establish a predictable schedule for when you can expect payments before the project even begins.

Utilizing invoice templates

Along with ambiguity in the estimate process, unclear terms in an invoice are also a catalyst for delayed payments. Regardless of how you create an invoice, there are a few key things that should be included no matter what:

• Set clear terms from the jump – what does the payment structure look like, within how many days do you expect to be paid upon receipt of the invoice, etc. 
• Establish a late fee policy – this is up to the discretion of your business but sets a clear understanding of when late fees will be added to the total amount due
• Invoicing promptly and professionally – selecting a free template from invoice template platforms such as Invoice Home. Your business should establish what the template will look like, the cadence for when invoices will be sent and how they’ll be sent to clients. This should be communicated in advance of the service. 
• Offering payment options – offering easy-to-use and convenient payment options for clients. Opting into a service that offers automated reminders can also be a helpful tool 

Automating invoices with digital tools

One way to get in front of delayed payments is sending invoices on time. Issuing invoices quickly could drastically reduce that alarming percentage, and it’s the easiest way to speed up payment.

Leveraging digital tools to make this process automatic is the first step in ensuring your business is set up for success. This helps avoid batch invoices at the end of the week or month, both of which delay payment since you are just sitting on your bill.

Digital tools can also increase visibility, providing real-time status of account status and allowing you to pinpoint who has a history of on-time payments and which accounts tend to wait until the 60- or 90-day payment mark.

Hesitation in implementing automation

Most businesses know they should move towards automating processes, from invoicing to collecting payment to even project management, but many are hesitant to make the move. Many GCs and subcontractors still rely on manual workflows out of habit, and a concern that adopting new technology will be too complex. As payment cycles continue to lengthen and margins remain tight, manual processes can become a significant barrier to financial growth. 

Only 17% of businesses surveyed by American Express last year had fully automated their payments processes. The leading concerns? Cost (45%), not believing it would benefit their business (28%) and security (26%). As with any new process, there is always a pinch of skepticism. However, when it comes to financial processes, the benefits of automation usually outweigh the risks, reducing processing time and human error.

Cash flow equals growth, and even a one- or two-day delay on payment can delay long-term growth strategies for small businesses. Late payments can be the difference between bidding on a dream project and sitting it out.

It’s inevitable that you’ll find yourself with unpaid invoices at some point. It’s important to have the tools and resources in place for the best possible outcome: resolving payment as quickly as possible. Being proactive in your communication and leveraging digital tools helps tighten the gap in delayed payments. A proactive approach to late payments can help create healthier, consistent cash flow and stronger business growth.

Petr Marek is the Co-Founder and CEO of Invoice Home, an invoice-generating platform designed for small businesses, freelancers and entrepreneurs. Invoice Home currently has more than 12 million users worldwide.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners. To contact the editor responsible for this piece: zeb@hwmedia.com.