In a recent report published by Levelset and Fieldwire, over 500 companies in the construction industry were asked about payments and payment delays. Some of the responses were surprising. It seems that, because most construction companies expect payments to take a long time, they actually engage in habits that encourage late payments. By practicing these habits, subcontractors are actually training their customers to delay payment, often without realizing it. In this article, we’ll look at steps contractors can take to encourage their customer – the GC or property owner – to pay faster.
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The bad payment habits of contractors (and suppliers)
Contractors overwhelmingly report that slow or partial payments are taking a toll on their business:
- 80% of contractors say they spend a moderate to substantial amount of time collecting late payments
- 49% of companies wait more than 30 days for payment
- 16% wait longer than 60 days for payment
Habit 1: Offering long payment terms
Most companies offer their customers at least 30 days to pay, some as many as 45 or 60. According to the 2020 report, 59% of companies offer terms of 30 days or longer.
Of course, when the industry average is 83 days, most construction companies would be thrilled to get paid in 30 days. In fact, almost 10% would be ecstatic to get paid in a month and a half: nearly 1 in 10 offers their customers more than 45 days to pay! Unfortunately, as a result, they end up selling themselves short.
There’s a difference between the terms a company offers and the terms you receive. Think of it as a negotiation: You give your best offer, and your customer gives theirs. Ideally, you end up meeting somewhere in the middle. If 30 days is your starting point, how likely do you think it is that your customer will meet that deadline out of the gate?
Not likely. In actuality, only about 40% of construction businesses report receiving payment within 30 days. That’s not so surprising when you get to habit #2…
Habit 2: Not charging a late payment penalty
Many construction contracts, credit agreements, and invoices require payment according to specific terms. They stipulate that interest or penalties will accrue if the GC or property owner doesn’t pay per the terms of the agreement.
Unfortunately, 70% of contractors say they rarely or never charge interest on late payments. But why? By the time they get paid, they’re likely just happy to have their payment in hand. Even if their contract included a late fee, they don’t want to deal with the hassle of chasing the property owner down for another 5% on top.
Nearly 3 in 4 contractors will accept a late payment without penalty – effectively training their customer that it’s okay to pay late. The next time you submit a payment application, do you think your GC or property owner will be rushing to pay your invoices?
Habit 3: Not offering incentive for early payment
Does your company offer the GC a discount for early payment? More than three-quarters of contractors surveyed said they rarely or never offer discounts for faster payment.
Of course, this one can get tricky. Many contractors budget based on the draw schedule that was in their contract, so they think it doesn’t matter to them if they get paid in 5 days or 29 days. (But really, they’ll take payment in 40 days without blinking.)
They don’t realize that every day that a contractor doesn’t get paid, they’re paying a cost. One of the biggest costs of slow cash flow is slower business growth. You can’t start a new project until you have enough cash to get it off the ground and cover your mobilization costs. If you could cut your days sales outstanding (DSO) in half – collecting on your invoices twice as fast as you currently do – you could double the number of projects you can take on.
The people in charge of a construction project have their eye on the bottom line, just like you should. If you offer a GC a discount for early payment, they might have enough cash to pay your invoice up front, while they wait for the payment from the owner. In the end, you both win. You get cash faster, the property owner pays as scheduled, and the GC pockets the difference.
Habit 4: Failing to send invoice reminders
You would think that companies waiting 45 days for payment would be contacting their clients to find out what the hold-up is. Apparently not.
Only 44% of contractors say they send invoice reminders after billing. That seems crazy, especially because sending an invoice reminder is an incredibly easy and effective way to speed up payment. And it can be as simple as a one-line email: “Hey Phil, just a reminder that our invoice is due in 10 days.” Payments get delayed for a number of reasons. Sometimes, Phil just forgets about it!
Every construction company should include invoice reminders in their payment process. Use an invoice reminder template; send them a hand-written note; shoot off a text message! Just do it, and do it regularly. Send a reminder before the due date, on the due date (late fees start tomorrow), and a few days after the due date if necessary (final notice!).
(Since fewer than half of construction businesses use something as simple as an invoice reminder, it shouldn’t come as a shock to learn that only 15% send demand letters when they don’t get paid. We won’t get into that today. Just know that demand letters can be very effective at spurring a customer to pay.)
Habit 5: Neglecting lien rights
In many states, in order to protect your right to file a mechanics lien on the job site property, you have to provide a preliminary notice letting the owner know that you are working on the project. In some states, contractors are also required to send a notice of intent (to lien) before they can actually file.
Sadly, only 29% of construction businesses say they often send preliminary notice. And only 20% say they regularly use a notice of intent if their payment is late.
Contractors may feel that sending a preliminary notice or filing a lien might cause a problem in their relationship with the customer. And relationships are important in construction – 56% of contractors say they don’t protect their lien rights because they don’t want to lose a customer.
Too many subs and suppliers fear that sending a prelim is like a threat: “If you don’t pay me, I’m going to file a lien!” The reality is that sending preliminary notice is actually a good way to prevent mechanics lien claims. Receiving a prelim actually gives significant benefits to property owners and GCs: it improves communication and reduces conflict. It can be really difficult for them to identify every company that’s on the jobsite and make sure they get paid. Sending preliminary notice lets them see that you’re on the project, and are expecting payment.
At the end of the day, ask yourself this question: If you’re working with a property owner or GC who is slow to pay (or refuses to pay!), do you really want to continue in a relationship with them?
How to train your GC to pay faster
Training your hiring party to pay your invoices faster isn’t rocket science. It’s all about sending them signals that you take your payment seriously.
First, set up a credit and collection policy that is standard for all your clients. It doesn’t have to be a complex document. State what your payment terms are and what you will do when payment is delayed. If you don’t know where to start, download this sample credit policy for construction companies and customize it for your needs.
Next, be proactive and communicate with customers about late payments. An email asking for the status of the payment is fine; or you can mail a copy of the invoice as a reminder. Many construction accounting programs will automatically send reminders when payment is past due.
Assess late payment fees and/or interest charges consistently for all customers. Pass the cost of late payments off to your customers. Use your accounting software to automatically calculate and assess these charges on a monthly basis.
Finally, be vigilant about exchanging documents to maintain your lien rights on all projects. In many states you will need to file some sort of preliminary notice stating that you are on the job. But it’s a good idea to get in the habit of
Want to get paid faster? Build better contractor habits
Why is the construction industry so complacent when it comes to getting paid? Even with all the late payments, 53% of businesses in our survey said they were happy with how quickly they get paid for their work. Have we become numb to the fact that our receivables are always 30 days plus?
The answer to fixing late payments in construction is to set a firm credit policy, follow up on late payments, assess fees or interest charges consistently, and protect your lien rights. With these steps you can re-train your clients to provide prompt payment.