Billions Lost Per Year Due to Slow Construction Payments

Time is money. We have all heard this so simple, yet so overlooked phrase. It is easy to understand the less time you spend on trivial tasks, the more time you can spend on important decisions. But what are some real applications of this idea? When it comes to construction payment management, "time is money" could not be more true.

Pricewaterhouse Coopers (PWC) reports an average 96-day turnaround on payments to general contractors and subcontractors. This is a gross misuse of time and money management within the construction industry.

Lets put this in a more simple perspective...

Imagine you're 16 again, working your summer job mowing lawns or babysitting. You are probably expecting to get paid right when you are done with the job so you can go get a soda and candy bar that afternoon, right?

However once you are done, the individual who hired you says, "excellent job...now come back in 96 days and I can pay you!" Yeah, I'd be pretty upset too. Looking past being upset, you probably aren't going to want to work for them again. At the very least you are unmotivated to do an exceptional job for them next time.

How to Optimize Construction Industry Payment Management

Going back to the construction industry, we have much more real consequences to a 96-day turnaround. For example, interest and client relations.

In fact, studies by Rabbet found that slow payments cost general contractors a startling $64 billion in 2019. This is $24 billion more than in 2018, revealing this issue is only growing.

It may seem that construction payment management is a financial concern only pertaining to executives and accountants. In reality, project managers have the most influence and concern for this issue.

Construction payment management is an important aspect of any project manager's job. Accordingly, it has far-reaching effects on day-to-day functions. This may be your first time learning about this issue. Or you may be frustrated at the time you take on billing. Regardless, the topics below will help you optimize your construction payment process. 

#1. Improve Your Bidding Process

As an estimator or project manager knows, bidding on new projects is not something you can do in an afternoon. It takes a tremendous amount of time, skill, and research.

Companies need the appropriate amount of overhead to invest in new project proposals. This means extra time and money.

⏰ Time is Crucial

The time needed to conduct research and communicate with the project owner is incredibly valuable. Putting together a custom proposal based on your research of the potential project can be a lengthy process.

You also need to take time to analyze whether your company is a proper fit with the right resources for the job. The amount of time taken to research may determine whether all of your efforts towards winning the bid will be wasted or not. Bottom line... You need to allocate as much time and attention as you can afford towards your bidding processes.

💵 Need Some Extra Cash

While you are taking much needed time to research the potential project, soft costs are going to naturally add up. You have to pay the salaries of the employees you assigned to do the research, design drawings, and all other project proposal preparation. These soft costs are necessary to close new bids so… More cash is needed in your bidding process.

But where do you find this time and money?

You can reallocate the needed time and money for your bidding process. You do so by improving your internal payment processes. Most companies waste countless hours and dollars going through an outdated and hard payment process each period. If you adopt new innovative billing software, you will save hours each billing period. Crucially, all of this time and money can be used towards securing new business for your company.

#2 Finance your start up time

Project start up time can be a savior or a villain, and you never know what you are going to get out of them.

When business is booming, long project startups can save you. They give you time to allocate your resources in the right place. Additionally, they allow you to mitigate your risk in three ways: deep pre-construction analysis, proper project planning, and better subcontractor sourcing.

When the market is slow, short startup times are necessary to get your cash flowing again. Unfortunately, we can not always control our startup times. Accordingly, this increases the risk of coming up short on cash.

Making sure that your process for construction payment management is optimized will prepare you with cash flow. In other words, cash in hand prevents many crises. 

#3 Collect discounts from suppliers

The majority of subcontractors and material suppliers have stated that they would offer a discount in exchange for net 30 payments.

Invoice terms come with a time limit that determines whether you will get a discount and/or a late fee. If an invoice is paid before the time limit, a discount is applied. If the invoice is paid after the time given, a penalty is applied. These penalties and discounts add up quickly.

The reason you or your subs would offer a discount is to increase cash flow. If it costs you $2,000 per day to finance a project, late payments can stack up. As a result, financing your projects becomes an even larger issue. Give incentives to pay off invoices quickly, and you can worry less about late payments. 

Discounts are a great idea when you need a little cash now more than that extra percent later. For example, if you are short on money to finance a project. Loans frequently have high interest rates. As a result, you pay more in the long run. A better alternative is to offer a small discount to get your invoices paid on time.

Taking advantage of invoice terms can drastically improve your cash flow. Additionally you save money, and improve relationships with clients and subcontractors.

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❓How will discounts help?

With the increased cash flow and savings from discounts, you can give lower bid prices and secure more work. Additionally, over 70% of subcontractors submit bids 1% to 5% lower to contractors that are easy to work with and pay on time. Now that you see improving your payment processes can drastically improve your overall business, let's ask the important question... HOW do you improve your construction billing processes?

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How do you decrease time spent on construction billing?

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Spending countless hours each billing period fixing mistakes and doing hard paperwork does NOT have to be a norm for your business. In fact, fixing these issues is much easier than you may think...

Here are a few quick fixes.

A. Integrate with Internal Systems

Most modern companies have accounting software, but they fail to reap all of the benefits these software offers, especially with software integration. Accounting software, timesheets, payroll, and countless other internal systems have the ability to integrate and work together in one place. It is a very easy and very beneficial process for construction payment management. Integrating these systems can drastically reduce the amount of work and confusion for back-office employees. In return, you will be able to send and receive payments much easier and faster than before. If your company uses Sage 300 for your accounting software, it can integrate with Flashtract's construction billing software making it easier to review and approve all of your payments.

B. Electronic Payment and Signatures

“The check is in the mail” is essentially an excuse used by the client to buy more time. There are countless reasons the check can be delayed, but an absolutely unnecessary reason is that the check is in the mail.

This is the 21st century, the age of the internet, the time of self-driving cars, whatever you want to call it. Waiting 3-5 days to be mailed a check is totally unreasonable. Pull out your laptop or phone and get it done now. Even your grandpa can do it.

Let’s do some quick math. Say your firm does $10 million in revenue each year. You have a 7% interest rate (this is a great rate for engineering and construction) and still, have your checks mailed to you. This means that each day you have to finance is costing you just under $1,917 ($10,000,000/365 * 0.07). So, if you wait for the check for 5 days, that’s nearly $10,000 WASTED.

There are plenty of easy, online billing systems that allow you to request payment, create invoices, and even electronically approve and sign documents. Instead of waiting for 3-5 for a check in the mail, you can handle any step in the billing process at the click of a button, anytime, anywhere.

C. Customize Billing Periods

Consider customizing the time of each billing period to better fit each client. The standard billing period is one month. Although some clients such as foreign real estate firms, private equity developers, or remote owners would rather receive larger bills, less frequently. Giving these clients the option to do billing on a bi-monthly basis will increase their likelihood of completing the payments on time while improving the relationship between both parties. Additional, giving control o shorten or lengthen their billing periods will also help you by not having all of your billing responsibilities stack-up at one time each month.

D. Be Persistent, Use Reminder Tools

Don't be afraid to reach out and remind that subcontractor or client that you expect all payments to be completed promptly. We all know you have to be assertive and stay on top of everyone in this industry. Doing so denies your client the ability to say they forgot, or they couldn't find the invoices. Send them reminders in multiple ways, at several times. This can even create leverage for you in legal situations if you have proof you sent reminders and invoices multiple times.

It is that simple, and that effective.

Empower your teams & save money

Flashtract provides a simple construction billing software that will solve all of your construction payment management issues for you. We help you not become part of the $64 billion lost to inefficiency in the industry. Instead, you can get ahead of the competition with powerful, modern tools that automate your billing and documentation process.

• Integrating accounting systems
• Customizable billing periods
• Electronic payments and signatures
• Free automated G702 and G703 forms
• Tracking project and billing progress

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