- Intro to Construction Accounting
- Key Accounting Reports for Construction
- Recognizing income
- Chart of Accounts
- General ledger
- Best practices for billing
- 8 ways to improve accounts receivable
- Tips to improve accounts payable
Properly invoicing might be the most crucial step to managing your company’s accounts receivables. Between overhead, notoriously slow payments, and the general nature of a credit-heavy industry, it’s easy to find yourself in a bind. Creating accurate and timely construction invoices can help you get paid sooner and avoid the nightmare scenario: running out of cash.
It might seem elementary, but it’s important to go back to the basics…
Table of Contents
What are construction invoices?
An invoice is a document a contractor, sub, or supplier sends to their customer when payment is owed for work performed. Invoices establish a payment obligation, thereby creating an account receivable. Essentially, it’s a written record of the purchase agreement. Invoicing is what keeps the cash flowing.
A typical construction invoice will include:
- The date the invoice was created
- Names and addresses of both parties
- Description of the goods and services
- The price and quantities for those goods and services
- The terms of payment
Of course, every construction business handles their invoicing differently, plus the relevant information on an invoice will change quite a bit depending on the work that’s being performed.
What aren’t invoices?
There are some other documents commonly paired with or used as an invoice. But that doesn’t mean invoices aren’t necessary.
Payment applications are used when payment is received, which then must be applied to an account balance. These are typically a bundle of documents with all the relevant information to support the release of payments. A contractor or sub’s payment application may include a number of invoices from different sub-tier businesses and vendors.
Purchase orders are pre-transaction documents. They serve as a record of the customer’s order and are used as part of the approval process, while invoices are a record of the receipt of the products or services and the payment terms. So, an invoice will usually reflect terms agreed to via purchase order.
Verbal requests for payment don’t constitute an “invoice”. This one’s obvious, but it still needs to be said. Requests for payment should always be put to writing. Now, that doesn’t mean that substantial payment talks can’t happen in person, over the phone, or via text. But, some written records showing that payment was requested should be present – regardless of whether there have been any difficulties on the job.
You can’t talk construction accounting without mentioning the schedule of values
Construction Invoice Best practices
Every construction business has its own invoicing practices, and everyone knows what works best for them. Still, there’s always room for improvement. Here are some best practices for construction invoicing.
Send timely invoices
Just last year, only 8% of contractors said that their customers consistently paid them on time. The longer you wait, the worse it will get. Be sure to send your invoices as quickly as possible (while still being reasonable). When invoices are sent late, payment will almost assuredly come late. Plus, late invoices tend to stir up more confusion than those made on time. Be sure that the client receives the invoice while the work is still fresh in everyone’s mind.
Keep invoices clear, but detailed
Be sure that the client knows what they’re paying for. It’s a good idea to provide enough information to support the requested payments, but not too much where the invoice becomes illegible. One easy way to accomplish this is through standardization. Invoice requirements might differ somewhat from project to project, but having a basic format and uniform method of labeling work or products helps everyone. It keeps your business organized while providing clear indications to the client. As a bonus, it also gives invoices a professional touch.
One important detail to always include is a reference to the quote or estimate. There shouldn’t be any discrepancies between the invoice and the initial quote or estimate. This provides an easy reference and shows exactly how the pricing is determined.
Be sure to maintain an organized record of all things related to the invoice. Keep all receipts and timesheets from the project. Documentation is crucial in the construction industry. Contractors are paid for the work they document, not necessarily the work they perform. If a dispute arises concerning payment, you’ll need documentation to validate prices and payment terms.
Short (but reasonable) payment terms
Typically, invoices provide for 30 days of credit, though some larger companies even go as high as 120 days. But, why? It’s a construction company, not a bank. Longer payment terms lead to higher debt ratios which can be fatal to a company’s finances. Why should a construction business float the credit? Many small to medium sized businesses are using 7 days to help maintain consistent cash flow.
Obviously, that’s much quicker than the industry norm, and payment won’t come that fast for the majority of construction businesses. Still – don’t be afraid to ask for better payment terms, and don’t get pushed into accepting overly-burdensome payment terms. Building trust and a collaborative relationship with your customer will help on the path toward securing better terms.
Early pay incentives or late pay penalties
An easy way to speed up payment is to offer discounts if the invoice is paid before the due date. Conversely, some companies opt to include late payment penalties. Only 43% of companies incentivize early payments or penalize late payments. This is a simple tweak to your payment terms that can expedite payments.
Keep in mind, though – incentives cut into the bottom line. Margins are tighter than ever in this industry, and it shouldn’t take discounts and incentives to be paid fairly. As for penalties – they can be a great tool to encourage timely payment. But it’s important to avoid antagonizing customers, too. As with everything else, the use of discounts and penalties will make a lot of sense in some situations, but they aren’t a blanket solution.
This is no time to be shy. The squeaky wheel gets the grease! Don’t be afraid to follow up when an invoice remains unpaid. Several things can occur to cause clients to sit on invoice payments. They can get missed, lost in a pile of other invoices, or just plain ignored! Be sure to follow-up with phone calls or emails, to be sure you end up getting paid what you’ve earned. Before resorting to payment demands, it’s a good idea to reach out and discuss the invoice with a customer.
Send conditional lien waivers with invoices for faster payments
One of the most common reasons for slow payment is the collection of lien waivers. Often, payment won’t be released unless lien waivers have been obtained for every dime. At the same time, contractors, subs, and suppliers know that mechanics lien rights provide unparalleled power when it comes to obtaining payment. So what gives?
This is where conditional lien waivers come in handy. In the strong majority of states, conditional lien waivers can be used in order to assure a customer that they won’t have to pay twice, while also preserving the right to lien if something goes awry. By submitting a conditional waiver, no rights are waived until payment is made. At the same time, once payment comes, lien rights for that payment are permanently waived.
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What to do when invoices remain unpaid
Even when a construction business does all the right things, payment issues could still arise. So what should a construction business do when their invoices remain unpaid?
Follow-up on the invoice
Don’t suffer in silence. As mentioned above, following up on an unpaid invoice is perfectly acceptable – and most customers are reasonable enough to talk about the payment delay. Talking it out should always be the first option when it seems like a payment issue might be oncoming. Plus, that might help identify the source of the delay, how long you can expect to wait for payment, and what next steps might become necessary. It might be a good idea to follow-up on an invoice a few times before taking more drastic action.
Making payment demands shouldn’t be the first step when payment is a little late, but it could become necessary. By sending a document like a notice of intent to lien, a construction business can let their customer know they’re serious about payment, while also providing an opportunity to resolve the issue without the need for immediate legal action or a lien claim. Keep in mind though – owners and customers don’t typically take kindly to lien threats. While a notice of intent to lien is a great payment recovery tool, it’s important that a party who sends one can back up their payment claim with sufficient documentation.
Of course, making demands outside of the mechanics lien process could help, too. Sending payment demand letters threatening specific legal action (like a breach claim, prompt payment claim, or retainage claim, to name a few) can go a long way toward compelling payment – especially when sent via an attorney.
Take action when necessary
When push comes to shove, it’s important that a construction business understands what tools are available to help recover payment. Mechanics lien claims may be the most powerful tool in this regard, and payment bond claims mirror the recovery tool for public works. Both mechanics lien claims and payment bond claims were specifically tailored to provide recovery options that aren’t as expensive, slow, and risky as litigation. Where a lien or bond claim isn’t available, pursuing legal action or taking to small claims court can always get the job done.
But again – merely leveraging these tools into faster payment will generally be a better option than actually moving forward with any of them.
Tips for invoice review & approval procedures
In a construction payment utopia, subs and suppliers would submit invoices with the exact total amount of hours worked, for the predetermined price. Unfortunately, this isn’t the case – not yet. Contractor invoices are often fraught with honest mistakes, duplicated, or even worse: they might even be fraudulent. Having a proper invoice review and billing procedure in place can save your construction company’s finances.
Verify the work
Be sure the work was not only actually completed but completed correctly. Sometimes invoices will be sent before the work has even begun. Or, if the job is botched, you may want to consider withholding payment until the work is brought up to snuff. Inspect the job site to be sure. Also, check the scope of work in the contract documents. You don’t want to pay for work that wasn’t expressly authorized or was performed by someone else.
Double check for double payments
One of the most common problems in approving construction invoices is double payment. Most construction businesses are honest, and a double billing could simply be a mistake. Other times, subs and suppliers may attempt to use invoice sleight of hand. They might bank on the fact that construction offices are inundated with paperwork, hoping for a quick glance and approval of their invoice. Keep a close eye on the description of the work claimed to be performed, and the line item dates. Double check that this work hasn’t been claimed in a previous invoice. Never pay twice for the same work.
Request & review supporting documents
An invoice is only as good as the supporting documents. It may seem like a hassle, but this is a crucial part of ensuring accuracy. These can potentially include receipts, daily reports, timesheets, payroll records, and any additional information that can verify that the work and hours claimed have been performed.
Confirm the business contact information
If there is any inconsistency in regards to the sub or supplier’s company information, it should be confirmed. Check the name, address, and tax ID number. This could be a simple typo. Be sure that the information lines up with the information in the contract documents. But it could also mean a change in ownership. Make sure the money is going to the right place.
By tightening up the construction invoice process, industry members can speed up payments and avoid costly disputes. Stay familiar with billing procedure best practices by subscribing to our construction payment blog or chatting with one of our experts today!