Accounts Receivable Management for Construction Companies

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The difference between a struggling construction business and a successful one often boils down to good accounts receivable management. It can take a long time to get paid in construction – 83 days, on average – so tracking and following up on outstanding invoices is a critical skill for contractors and suppliers alike. A good credit policy will provide several keys to improving accounts receivable (AR). But that’s just the beginning.

Better AR management: Look at your credit policy

Everyone in the construction and building materials supply industries should have a clear and well-thought-out credit policy. While “credit policy” may seem fancy at first, it’s a simple concept.

A credit policy is just a set of written guidelines that establishes:

There’s another component to credit policies in the construction and building material supply industries: A lien policy. We’ve discussed the Lien Policy concept in the past, and it is simply a set of written guidelines to dictate how the company will preserve its lien and bond claim rights and under what circumstances they will execute them.

1. Make good credit decisions

The first thing a credit policy should do is set forth the customer qualification criteria. If you’re extending credit to everyone that comes through the door your company is making a huge mistake.

Standard business rules for credit decisions

Standard business rules apply to the construction and building material supply industries because companies in these industries are…businesses. Generally speaking, you need to review a company’s credit history and worth when deciding on a credit line.

Further, you need to monitor that company’s credit because it can change during your relationship with them – sometimes quite surprisingly. Use Levelset’s Contractor Profile pages to stay up-to-date on recent lien filings and other indicators of payment issues.

Trade-specific rules for credit decisions

Most businesses have to be concerned about their customer’s credit health. In the construction and building material supply trades, however, there must be a concern for the credit health of the underlying construction project and other parties on the project (i.e. the lenders, the sureties, the general contractors and owners).

2. Preserve your right to file a lien or bond claim

This second part applies only to those in the construction and building material supply industries. It is a step required at the onset of a credit decision or construction project, and it involves taking the necessary steps to preserve your lien and bond claim rights on the project.

While laws vary across the country by state or project type, the general rule is that a “preliminary notice” must be sent at the start of furnishing to preserve lien and bond claim rights.

There are two things to take from this article’s section:

  1. Lien and bond claim rights are a huge asset for the construction and building material supply industries; and
  2. You need to take proactive measures immediately when furnishing services or materials to preserve that asset.

3. Send smart invoices

A portion of this third part should be a no brainer: Send invoices.  If you don’t send invoices to bill for your services or materials you’re not likely to get paid.  This section, however, does not direct you to simply “send invoices.”  It directs you to “send smart invoices.”

Sending “smart” invoices boils down to doing two things:

  1. Leverage technology to send invoices in a way that increases delivery success and encourages payment; and
  2. Use data to set intelligent terms.

Leverage technology

There are tons of invoicing solutions out there for both the SMBs and Enterprise organizations. These solutions make invoicing painless for your company to send, and more importantly, painless for your customers to receive and pay.  Take advantage of these technologies or suffer the consequences.

If you don’t want to shop around, let me direct you to two.

  • If you’re a small or medium sized business, go with Freshbooks.
  • If you’re an enterprise organization, try BillTrust.

Use data to set intelligent terms

You may have heard about the data revolution. If not, your business needs to get with the program. You can improve your company’s bottom line by just paying attention to your own data and the public data out there about your industry. Making tiny changes to the wording on your invoices can result an increased percentage of on-time payers, which can result in big money for your company.

Freshbooks has a great article on the Best Invoice Terms To Get You Paid Faster.

4. Follow up on receivables

Following up is a huge part of successful accounts receivable management.  Everyone in the credit and collections industry knows that the longer you wait to collect on an invoice, the harder it will be.

Another thing everyone in the credit and collections industry knows it that following up on on an invoice is critical to preventing a “slow paying” customer from turning into a “non-paying” customer.

Send invoice reminders before an account is due, and automate this process as much as you can.

And as Meredith Wood suggests in an article on resources for A/R management, get on the phone.  She even provides call scripts and tips to use for collections efforts.

Don’t let your receivables age. Follow up. Take action. Handle the excuses, and determine if next actions are needed.  Which brings us to…

5. Take the next steps

An invoice is aging. What to do? What are your options? What are your next steps?

Understand your options

Waiting is not an option. Some options include filing a mechanics lien or bond claim, factoring an unpaid invoice (that’s not yet overdue), putting the receivable on the auction block through a company like Receivables Exchange, sending a demand letter, or submitting the account to collections.

File a mechanics lien or bond claim

We’re big believers in the value of using the mechanics lien or bond claim process to get paid.  There’s lots of information on this blog about why this is important, including How Security Instruments Can Help Your Collections Procedures. Don’t ignore this very, very valuable collections tool.

Go to collections or lawsuit

Don’t let a sour account fester.  Get it in the hands of a qualified commercial collections agency or file a lawsuit.