Imagine finishing a large project on schedule and within budget, only to have to wait weeks or even months for payment. Delays in payments are more than simply a nuisance for construction companies; they can interrupt operations, cause cash flow issues, and even lead to financial instability. But why are these delays occurring, and what can you do about them?
In this post, we will look at the impact of payment delays on construction income, how they influence your bottom line, and how to manage and prevent them.
How Do Payment Delays Impact Businesses?
1. Cash Flow Disruptions
Any business needs cash flow to stay alive, but in building it's even more important. If you don't get paid on time, you might not have enough cash on hand to pay workers, buy goods, or pay subcontractors. This could slow down or stop projects that are already going on, making it harder for you to take on new work.
2. Increased Borrowing Costs
If you don't get paid on time, you might need credit lines or short-term loans to get by. You can't grow your company as fast when you have to pay a lot of money in interest and loan fees.
3. Strained Relationships with Subcontractors and Suppliers
A building company might have trouble paying its suppliers and subcontractors if it doesn't get paid on time. This hurts trust, could lead to court problems, and could make it harder to do business in the future.
4. Revenue Loss and Reduced Profitability
Construction income depends on payments being made on time. When payments are late, the money you plan to make goes down, which makes it harder to invest in your business, hire more people, or grow.
Common Causes of Delayed Payments
Cause | Explanation |
Retainage Issues | Many contracts hold back 5-10% of payments until project completion, delaying full payment. |
Slow Invoice Processing | Complex invoicing systems or errors can cause payment delays. |
Payment Disputes | Disagreements over project scope, quality, or deadlines can delay payments. |
Poor Payment Terms | Contracts that don’t specify clear payment deadlines lead to uncertainty. |
Client Cash Flow Problems | If a client is struggling financially, they may delay payments to contractors. |
Why Are Delayed Payments So Common
1. Retainage Withholding
Many contracts hold back a portion (usually 5-10%) of payment until project completion, which can delay contractor revenue for months.
2. Poor Payment Practices by Clients
Some property owners or general builders just wait to get paid as a business move, using contractors as unofficial lenders.
3. Unclear Invoices or Disputes
If invoices aren't clear and complete, customers may challenge charges, which adds to the time it takes to process accounts payable.
4. Lengthy Approval Processes
Before payments can be made on big projects, they have to go through several levels of approval, which slows down the whole accounting system for the building industry.
5. Economic Slowdowns & Cash Flow Issues
When the economy gets bad, clients and coders may put off payments to keep their own finances in good shape.
How to Protect Contractors from Payment Delays
1. Strengthen Your Payment Terms
Include strict payment terms in your contract (e.g., “Net 30” or “Net 15”).
Charge late fees for overdue invoices.
Set up progress payments to ensure steady cash flow throughout the project.
Example: A general contractor working on a commercial buildout includes a "Net 30 with a 5% late fee after 10 days" clause in their contract. When a client misses the deadline, they receive a formal notice about the late fee, encouraging faster payment.
2. Improve Invoice Accuracy & Speed
Use construction bookkeeping software to generate professional invoices.
Ensure invoices include all necessary details (job description, payment schedule, materials used).
Follow up with clients immediately after sending an invoice.
3. Track Accounts Receivable Closely
Maintain a real-time accounts receivable report.
Set reminders for overdue payments and follow up with clients regularly.
Example: A small plumbing company sets up an aging report in their accounting software to monitor outstanding invoices. They schedule automated reminders for overdue payments and follow up with clients via email and phone calls every 7 days until payment is received.
4. Offer Early Payment Discounts
Encourage clients to pay early by offering a 1-2% discount for prompt payment.
5. Use Lien Rights as Leverage
If payments are severely overdue, a mechanic’s lien can be filed to secure the contractor’s right to payment.
6. Consider Financing Options
Invoice factoring or construction financing can help bridge cash flow gaps while waiting for payment.
Example: A general contractor waiting on a $150,000 payment for a government project applies for invoice factoring. They sell the invoice to a factoring company, receiving 90% of the amount upfront. This allows them to pay suppliers and workers on time while waiting for the client’s payment.
How CCA Helps You Manage Delayed Payments
Many of these solutions can be put in place by contractors themselves, but managing building cash flow and accounts receivable can be hard, especially when they are busy running projects. That's where building accounting services come in handy.
At Construction Cost Accounting, our main goal is to help builders keep their finances in good shape by:
Tracking invoices automatically to cut down on late payments
Getting better at predicting cash flow so you're never caught off guard
Taking care of your debts so you get paid faster
Giving advice on how to avoid losing money by understanding payment terms and retention policies
Don't spend time chasing down missed bills and dealing with contractor cash flow issues. Let us take care of the money side of your business so you can focus on what you do best: building.
Conclusion
One of the biggest problems for contractors and accountants in the construction business is that payments are often late. You can keep your business from having to worry about money too much by setting clear payment terms, keeping track of accounts due, and making the most of your cash flow forecasting.
But if keeping track of your money is getting too hard, Construction Cost Accounting can help. Get in touch with me right away, and we'll get your building cash flow back on track!
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