3 days ago3 min read

5 Common Accounts Receivable Mistakes Contractors Should Avoid

Managing accounts receivable (AR) effectively is critical for contractors aiming to maintain steady cash flow and avoid financial pitfalls. Unfortunately, many contractors make common mistakes that can lead to delayed payments, strained client relationships, and jeopardized projects. In this article, we’ll explore five common AR mistakes contractors should avoid and provide actionable tips to improve your construction bookkeeping practices.

1. Inadequate Client Screening

Do you know who you’re doing business with? One of the most overlooked aspects of AR management is failing to vet clients properly. Contractors often accept projects without assessing a client’s payment history or financial stability.

Why It Matters: A client with a history of late payments or disputes can wreak havoc on your cash flow. Screening clients helps you avoid chasing overdue invoices.

Actionable Tip: Run credit checks and request references from previous contractors. Establish clear payment terms in your contracts and include penalties for late payments.

Read more: How to Handle Accounts Receivable Disputes: A Step-by-Step Guide

2. Lack of a Clear Billing Process

A disorganized billing process can lead to confusion and missed payments. Are your invoices clear, consistent, and sent on time?

Common Mistakes Include:

Sending incomplete invoices.
Not specifying payment deadlines.
Failing to follow up on overdue payments.

Actionable Tip:

Use a standardized invoice template with clear details such as:

Project name
Payment terms
Due date
Accepted payment methods

Invest in construction accounting software to automate invoicing and reminders, ensuring no payment slips through the cracks.

3. Ignoring Payment Follow-Ups

“If they haven’t paid, they’ll pay eventually” is a risky assumption. Contractors often delay or avoid following up on late payments, fearing they’ll damage client relationships.

Why It Matters:

Unpaid invoices can snowball, leading to serious cash flow issues. Following up promptly ensures clients prioritize your payment.

Actionable Tip:

Set up a consistent follow-up schedule. For example:

Reminder 1: 5 days before the due date.
Reminder 2: On the due date.
Reminder 3: 5 days after the due date.

Automated reminders via bookkeeping software can streamline this process and keep communication professional.

Read more: 8 Proven Strategies to Minimize Late Payments in Construction Projects

4. Underestimating Retainage Policies

Retainage—the portion of payment withheld until project completion—is common in construction. Mismanaging retainage can leave contractors short on funds during critical phases of a project.

Why It Matters:

Failing to account for retainage can skew your revenue projections and create financial management challenges.

Actionable Tip:

Track retainage separately in your construction bookkeeping system. Regularly review outstanding retainage amounts and follow up on their release once milestones are met.

Read more: Are You Maximizing Your Retainage Receivables in Construction?

5. Not Utilizing AR Metrics

Do you track your AR performance? Without monitoring key metrics, it’s difficult to identify issues and improve your AR process.

Days Sales Outstanding (DSO): How long it takes to collect payment.
AR Turnover Ratio: How often you collect on receivables.

Read more: Accounts Receivable Turnover Ratio vs. DSO: Key Differences Explained

Actionable Tip:

Review these metrics monthly to identify trends and make data-driven decisions. Implement tools that provide real-time insights into your AR performance.

How to Improve Your AR Management

1. Train Your Team: Educate your staff on AR best practices, including clear communication and timely follow-ups. Provide training sessions focused on:

How to create accurate and professional invoices.
Effective communication techniques for discussing payment terms.
Handling late payments diplomatically to maintain client relationships.

2. Leverage Technology: Adopt tools designed for construction accounting, such as QuickBooks, Xero, or specialized AR software like Procore. These tools can:

Automate invoice creation and payment reminders.
Track payment status in real-time.
Generate reports on overdue accounts and AR metrics.

3. Stay Proactive: Anticipate client issues by maintaining open communication and addressing concerns early. Develop a proactive approach by:

Regularly checking in with clients during project milestones.
Setting up a system to flag accounts with payment delays.
Offering flexible payment plans for clients facing temporary financial difficulties.

Bonus Tip: Maintain a detailed AR aging report and review it weekly. This will help you identify patterns of late payments and take corrective actions before they eruction bookkeeping which helps contractors streamline their financial processes. By partnerinscalate.

Conclusion

Managing AR can be hard and take time, especially for busy contractors. That’s where our services come in. At Construction Cost Accounting, we specialize in constg with us, you can: