In construction, it seems you’re always chasing payments. One recent survey showed that 100% of construction companies report at least one late vendor payment, and 27% say they receive payments 60 days or longer after the due date.

Late payments or defaults create a ripple effect, making it harder for you to plan projects, allocate costs and resources, pay your employees and contractors, and invest in new projects. Managing accounts receivable in the construction industry is essential to protect your financial health.

Here are some strategies and best practices to improve collections and lower you’re A/R turnover times.

Improving Your Construction Accounts Receivable Turnover

When you improve your construction accounts receivable turnover, you get paid more quickly. It creates a long list of benefits that improve your business.

Better Cash Flow

A faster turnover of receivables ensures that cash is available when needed, reducing reliance on credit lines or emergency funding.

Reduces Bad Debt Risk

By implementing sound credit policies and monitoring outstanding balances, you can minimize defaults and write-offs.

Improves Liquidity

Efficient management of your accounts receivable in the construction industry improves your liquidity, allowing you to cover operational costs and invest in growth.

Strengthens Your Creditworthiness

A strong receivables turnover demonstrates financial stability to lenders and suppliers, often leading to better credit terms and financing options.

Makes Financial Planning Easier

Predictable cash inflows make accurate budgeting and financial planning easier by reducing the uncertainty in project management.

Boosts Profit Margins

By minimizing revenue leakage from delayed or unpaid invoices, you can improve your margins and overall bottom line.

Construction Accounts Receivables Best Practices

By following a few best practices, you can significantly improve your accounts receivable in the construction industry.

Make Solid Credit Decisions

Establishing a consistent process for credit evaluation is essential in construction, where projects often involve large sums, extended payment cycles, and multiple stakeholders.

Start by reviewing business credit scores to assess the creditworthiness of clients, contractors, and subcontractors. Your reputation is on the line (and so is your cash flow), so you want to make sure you partner with people who are reliable and will pay you for the work you do.

Look for the warning signs that may indicate financial instability, such as:

• Poor credit scores
• High credit utilization (debt-to-income ratio)
• History of late payments or defaults
• Lawsuits, liens, judgments, or bankruptcy filings

Provide Clear Terms and Past Due Penalties

Clearly defined payment terms and penalties help set expectations and encourage timely payments. Before accounts hit the A/R, make sure you set reasonable credit limits. For example, new clients or contractors might get a shorter leash. You can tailor the terms and conditions of your agreement based on your risk assessment and your risk tolerance.

You should spell out billing and payment terms, progress payments, and conditions on payments. Include late payment penalties in contracts to deter delinquent payments.

Consider Early Payment Incentives

Conversely, you may want to consider adding early payment incentives to encourage faster payments and accelerate your cash flow. Many companies offer incentives such as a 2% discount for payments made within 10 days to avoid the typical lag time between billing and payments with construction accounts receivables.

You might also want to include language about providing rebates or rewards for consistent early payments.

Ongoing Account and Portfolio Monitoring

Regularly reviewing outstanding invoices and customer payment behaviors allows you to address potential risks before they escalate. Signing up for ongoing account monitoring can help you spot trends earlier. For example, if a contractor’s business credit score starts to drop or they start missing payments with suppliers, you’ll want to know. When you get an early notice of potential warning signs, you can take proactive measures rather than wait for default.

As a construction company, you’re spreading risk across multiple clients and contractors. Getting periodic portfolio reviews is also a good idea. This can make sure your book of business stays within your comfort level for risk tolerance.

Leveraging Lien Rights and Payment Bonds for Unpaid Invoices

In the construction industry, lien rights and payment bonds can also help keep to secure payments.

A mechanic’s lien can be placed on a property when a contractor, subcontractor, or supplier has not been paid for their work or materials. This legal claim ensures you have a right to receive payment from the property owner before the property can be sold or refinanced.

Payment bonds, often used on public projects where liens are not applicable, assure that you will receive payment for services.

The Bottom Line

Here’s the bottom line: efficient management of accounts receivable in the construction industry is critical to maintaining your financial health, paying your bills, and turning a profit. Professional credit management services can help.

Command Credit offers:

• Business credit reports: Gain insights into a company’s financial health.
• Account monitoring: Receive alerts on potential risks within your accounts.
• Credit portfolio monitoring: Evaluate your total exposure and implement risk mitigation strategies.

Take control of your construction accounts receivable today. Contact Command Credit to get started.