5 Tips to Enhance the Accounts Payable Process in Construction

Are you feeling overwhelmed by the constant influx of invoices, payment deadlines, and vendor inquiries in your construction business? If so, you're not alone. Managing the accounts payable process for a construction company can be a daunting task. But it's crucial for maintaining healthy cash flow and vendor relationships. In this article, we'll explore five proven strategies to streamline your construction accounts payable process. Also, making it more efficient, organized, and stress-free.

Understanding Construction Account Payable 

In the world of construction, account payable plays a crucial role in managing financial obligations and maintaining a healthy cash flow. Account payable, commonly referred to as A/P, is the money a construction company owes to its suppliers, subcontractors, and other service providers for goods and services received. It is a liability on the company's balance sheet and must be paid within a specified time frame, typically 30 to 60 days.

Read more: Construction Accounting Basis - What is Account Payable?  

How Account Payable Works in Construction

When a construction company receives an invoice from a supplier or subcontractor, it records the amount owed as an account payable. The company then has a set period to pay the invoice, which is usually determined by the terms of the contract or agreement between the parties. During this time, the company may negotiate discounts or payment plans with the supplier or subcontractor.

AP’s example: Let's say a construction company needs to purchase materials for a project. They place an order with a supplier for $10,000 worth of materials. The supplier delivers the materials, and the construction company receives an invoice. The company then records the $10,000 as an account payable on their balance sheet. They have 30 days to pay the invoice, during which time they may negotiate a discount with the supplier for early payment.

By understanding and properly managing accounts payable, construction companies can maintain a healthy financial position, build strong relationships with suppliers and subcontractors, and ensure the smooth completion of their projects.

5 Tips to Enhance AP Process in Construction

1. Automate Your Accounts Payable Workflow

In today's digital age, embracing accounts payable automation is a game-changer. By implementing specialized accounts payable software, you can streamline lots of tasks. For example invoice data entry, approval workflows, payment scheduling, and vendor communication. This not only saves you valuable time but also reduces the risk of costly errors caused by manual data entry.

Automation also enables you to set up custom approval rules and routing. This ensures invoices follow a consistent and transparent path from receipt to payment. With real-time visibility into the status of each invoice, you can proactively address any bottlenecks and keep projects on track.

Read more: Combine Bill.com and Quickbooks Online To Achieve Account Payable Victory in Construction Accounting

2. Establish a Robust Vendor Management System

Effective vendor management is crucial for maintaining strong relationships with your suppliers and subcontractors. Start by building a comprehensive vendor database that includes all relevant information, such as contact details, payment terms, and preferred payment methods. This centralized repository ensures that vendor information is up-to-date and easily accessible to your accounts payable construction team.

Additionally, implement a structured vendor onboarding process to gather all necessary documentation and information upfront. This proactive approach minimizes delays and ensures that new vendors are set up correctly in your system from the outset.

3. Implement a Streamlined Invoice Processing Workflow

A well-defined invoice processing workflow is the backbone of an efficient construction accounts payable process. Begin by establishing clear guidelines for invoice submission, including acceptable formats (e.g., paper, electronic), required information, and designated submission channels.

Next, implement a systematic invoice approval workflow that aligns with your organization's policies and project requirements. This may involve multiple approval levels, such as project managers, department heads, and financial controllers, depending on the invoice amount or project complexity.

Leverage invoice coding techniques to ensure accurate allocation of expenses to the appropriate cost codes, jobs, or projects. This not only supports better project cost tracking but also simplifies the reconciliation process during project closeout.

Read more: Progress Invoice in QuickBooks for Construction Accounting – Step by Step Instruction

4. Keep Track Your Invoice Payment Terms 

Managing invoice payment timelines is essential since terms differ among vendors. Payment deadlines outline when payments must be submitted to avoid penalties. Some suppliers may even incentivize early payments with discounts. However, vendors don't universally follow identical policies. Common payment terms include:

Payment Term	Description	Example
Net X	Payment expected X number of days after the invoice date	Net 30 - payment due within 30 days
EOM (End of month)	Payment must be made by the last day of the invoiced month	If you receive an invoice dated June 15th with EOM terms, the payment would be due by June 30th.
Upon Receipt	Immediate payment required upon receiving the invoice.	You receive an invoice on June 10th with terms "Pay on Receipt", meaning you need to pay the invoice immediately upon receiving it on June 10th.
X MFI (Xth of Next Month)	Payment due on the Xth day of the month after invoicing	If you receive an invoice dated June 25th with 20 MFI terms, the payment would be due on July 20th (20th of the month following the invoice date)
PIA (Pay In Advance)	Payment required before  the work is completed	You sign a contract for renovation work with PIA terms. You would need to pay the full amount before the contractor begins work

Adhering to these terms is vital to circumvent late fees, foster positive vendor relationships, and capitalize on any early payment incentives. Not meeting expectations can strain operations and finances.

5. Optimize Cash Flow Management   

Effective cash flow management is crucial for construction companies, as projects often involve significant upfront costs and complex payment schedules. By optimizing your construction payables process, you can better align payment schedules with project timelines and improve your overall cash flow position.

Consider implementing payment scheduling strategies that prioritize critical vendors and time payments to align with project milestones or billing cycles. This proactive approach helps you maintain positive relationships with key suppliers while ensuring that you have sufficient funds available when needed.

Additionally, leverage invoice tracking tools to monitor outstanding invoices and identify potential bottlenecks or disputes that could impact cash flow. Early intervention can prevent minor issues from escalating into larger problems that disrupt project progress or strain vendor relationships.

Example: Use a cash flow forecasting tool or spreadsheet to project upcoming expenses and align payment schedules with project milestones or billing cycles. Prioritize critical vendors or those with shorter payment terms to maintain positive relationships and avoid late payment penalties.

Leverage Outsourced Accounts Payable Services

For many construction companies, especially those with limited resources or rapidly growing operations, accounts payable outsourcing can be a valuable solution. By partnering with a reputable bookkeeping or accounting firm, such as Construction Cost Accounting, you can offload the time-consuming tasks of invoice processing, vendor management, and payment processing to a team of experienced professionals.

Outsourcing your construction accounts payable process not only frees up your internal resources to focus on core business operations but also provides access to industry-specific expertise and best practices. Experienced bookkeepers and accountants can leverage specialized software like QuickBooks and Sage 100 Contractor to ensure accurate and compliant financial recordkeeping.

Conclusion

By implementing these five strategies, you can transform your construction accounts payable process into a well-oiled machine, enabling you to focus on what matters most: delivering successful projects and driving business growth. Remember, a streamlined AP process not only improves operational efficiency but also strengthens your relationships with vendors, subcontractors, and suppliers – all of which are essential for long-term success in the construction industry.