Credit teams in the construction industry constantly battle late payments. In particular, subcontractors and suppliers performing labor or supplying materials to help permanently improve a property are farther removed from the money behind the project, and, therefore, must often deal with dreaded DSO (Days Sales Outstanding).
Read on to find out some of the best ways that credit departments can reduce the time between working on a project and getting paid.
1. Send Invoices Early
By sending an invoice at the beginning of the project or shortly thereafter, a credit manager can effectively notify the party that hired them of the work being furnished, which prioritizes that payment. Additionally, in a state like Texas where monthly notice requirements and lien deadlines are based on invoicing dates, it’s a good idea to continually send those invoices if unpaid.
P.S. Another good step for a credit manager to take is to attach a conditional lien waiver to an invoice that acts as a receipt of payment. This strongly motivates the paying party to make payment, because the waiver protects them from double payment and the risk of facing a mechanics lien.
2. Track the Project’s Lien Deadlines
It’s extremely important to know the pre-lien requirements and deadlines on a projects. Simply put, construction participants can ensure that a lien will be valid (if it becomes necessary to file one) by keeping track of the initial date that labor or materials were furnished to a project, and by measuring deadlines from this date.
Though this process can be done manually in-house, the best way to ensure that a contractor or supplier hasn’t missed a notice requirement or a lien deadline, is to use software that can provide clarity to the fragmented and nuanced laws for every state.
3. Send a Notice on Every Project (Even When Not Required)
Sending a preliminary notice to all of the other parties on the project and then following up with a notice of intent provides transparency to the other parties that might not know who is involved on the project. Secondly, it ensures that lien rights are secure and a payment is a priority. In fact, you should send preliminary notice every time – even if it’s not required.
By following up with the notice of intent to lien, a credit manager can warn the parties on the project that payment needs to be received, and if not, the next action is to file a lien on the property where work was performed or material was delivered. Property owners typically want to avoid lien filings, so informing them that a lien claim is imminent motivates them to get the payment ball rolling.
4. Develop a Coherent Credit Policy for Late Payments
A credit department should constantly look for ways to improve on DSO, credit terms, and collections processes. One of the ways to do this is to evaluate and optimize current processes, and write a new credit policy if the current system is lacking.
This includes considering what the initial terms of a credit application should include and the information that should be gathered – including trade references – for each new account as well as developing a coherent process for collecting unpaid money.
5. Take Action When Necessary
To mitigate risk and force payment, credit managers must sometimes understand when to take action. By taking the necessary steps – such as sending notices and filing mechanics liens – a contractor or supplier will ensure the path to payment.
After taking these steps, there’s always the actual property to fall back on for payment. This may include sending an account to collections or enforcing the lien through a lawsuit to follow up on the mechanics lien.
Credit teams in the construction industry know that late payments are a problem. By considering some of the above steps, credit managers can reduce DSO of construction invoices, increase cash flow, and provide a source of accountability company-wide on all projects.