Any principal of a construction firm will tell you that cash is king. There is little room for error when it comes to feeding the cash cycle. Why not apply the same focus and fervor to collecting the monies that are owed to your company as you do to installing the building components for which you bill?
Often, too much of the responsibility for collecting receivables is shifted to the accounting department. When accounting investigates the nature of an account and the reason for delinquency, it is often determined that the client has withheld payment because it has yet to receive consideration for payment as outlined in the contract. Examples range from a significant deviation from the schedule of values to failing to deliver as-built drawings.
Once accounting has determined the root of the problem, the information must be relayed to project management. The project manager then has to spend a day or two digging through the jobsite trailer, chasing down architects and drafting another proper payment application. By the time the project manager is prepared to submit the revised payment application, another billing cycle has passed and the project is out another 30 days on cash collection.
To break this cycle and get paid faster, construction firms need to realize that a project that starts well will generally finish well. The same can be said for the billing process on a given job. The first billing cycle is a project manager’s greatest opportunity to establish expectations with a client. Having your ducks in a row and billing properly from the onset will improve your ability to maneuver turbulent waters downstream.
Here are steps you can take at each stage of the project to avoid delayed payments:
Project outset. In the beginning of the project, there are typically no extraneous items that would impede payment. If the paperwork checks out and the payment application is delivered on time, you should expect payment in a timely fashion. Take note of how quickly the first payment application is processed and released. Use that period as a benchmark for subsequent billings. If receipt of payment deviates significantly from this unofficial schedule, that should raise a red flag for your project manager. If the first payment is delayed unreasonably, then take immediate action to secure payment. It is a matter of training the customer as to what you will and will not accept. As a first offense, pressing for payment should be done with grace.
Customer service. Proper billing may not be the first thing that comes to mind when you think customer service, but it can have a huge effect on the client relationship if it is mismanaged. Front-end loading a schedule of values and overbilling are common practices in the construction industry. However, extreme behavior in this arena can cause a client to halt release of payment. “Getting your hand caught in the cookie jar” can severely damage the client relationship from the onset of a project. Once trust has been eroded, it can be a long, uphill climb to regain it.
Collecting retention. At 5-10% of contract value, retention often equals or exceeds the net margins being realized in today’s construction markets. That being said, it is extremely important to collect on retention as early as possible. One of the most common issues in collecting retention is failing to deliver a completed project. The onerous task of compiling a punch list should not rest squarely on the client’s shoulders. As a retail consumer in your everyday life, you would not accept a transaction that included the caveat of a punch list attached to the “finished” project. Why should you expect your customers to accept this? Start by generating an internal pre-punch list. Collaborate with all members of the project team to devise an exit strategy and coordinate with other trades to execute the strategy. Setting a goal to achieve zero punch list items will help drive your exit strategy across the finish line. Monetizing the punch list can help both parties accelerate their performance and payment on major items.
Delinquency. Prior to commencing a project, or even signing a contract, your company should have a process for determining the creditworthiness of a client. There are many methods and sources for researching a client’s credit history, some more discrete than others, including Dun & Bradstreet, credit bureaus and banks. Contractors, subcontractors and clients often work together on multiple projects simultaneously. A payment concern on one project can quickly become a systemic risk for a large portion of your backlog. Having this information upfront should give you a clear indication of the payment risks involved in a project. Monitor your clients’ credit risk throughout the life of their contracts and know their financial standing at all times.
Managing receivables is not unlike managing physical construction. Simple actions can be taken at the onset of a job to improve the flow and conversion of receivables, including understanding your clients inside and out, establishing rapport that sets precedent for the remainder of the project, and having a plan for managing outstanding and delinquent accounts. It is hard enough to earn a dollar in today’s construction markets. The process of collecting that dollar should not be the bane of your existence.