Get Paid on Time and Minimize Cash Flow Problems in Your Construction Business

Cash flow is the #1 problem construction companies face. Oftentimes contractors have profitable businesses, yet wind up with a negative cash flow. This results in a struggle to make payroll, pay subcontractors, or cover operating costs. While the booming real estate market and the increased demand for home renovations have positively impacted the construction industry, the pandemic has highlighted new challenges and amplified existing ones.

Slow and Late Payments

The construction industry is plagued with slow and late payments. Getting paid too late can cause major financial problems for your business. With the increased demand for construction services post-pandemic, you have a chance to bid on a lucrative new project but waiting to collect on outstanding invoices could prevent you from seizing the opportunity.

Rethink Your Invoicing Practices

80% of companies say they spend a significant portion of their workweek chasing down payments. To improve your chances of getting paid in a timely manner, consider the following:

• Issue invoices early

Sending invoices before they’re due gives customers time to prepare themselves, ask questions, and secure funds. If you wait until the day an invoice is due to send it out, you’re already behind. Make it a habit to send invoices at least a week in advance.

• Automate

Get paid faster by using a tool like QuickBooks to automate your invoices. Also set up automated follow-up emails to remind your clients to pay their overdue invoices.

• Offer incentives and charge late fees

Encourage customers to pay on time by offering a small discount or incentive of the remaining balance. Conversely, implement penalties for late payments.

• Keep payment terms short

Anything longer than 30 days is too long. The longer the terms the longer it takes for you to get paid.

• Be clear

Spell out terms and list charges clearly so there are no disputes that could delay payment.

Progress Payments and Retainage

The majority of construction projects follow progress payments, contractors often only get paid once the job reaches a certain milestone. Also known as retention or hold back, retainage is the portion of the money that is held back by the customer until the project is completed. Unfortunately, progress payments and retainage can have a severe impact on a contractor’s cash flow. With new requirements for social distancing and reduced workforces on job sites, and the possible outbreak of COVID-19 temporarily halting progress, it’s important to reevaluate your current progress payment schedule so that you aren’t waiting too long to get paid.

Restructure Your Payment Schedule

Look at your current contract’s payment schedule and how it’s broken down. If you only require 3 payments (1/3^rd at deposit, 1/3^rd at milestone one, and 1/3^rd upon completion), your company must float 1/3^rd of the cost of the project between milestone one and completion.

Consider restructuring your contract to include more frequent payment increments and milestones. You’ll be paid more often, the smaller milestone payments will protect you from having to lay out a large sum of money in between payments. There’s no one-size-fits-all payment schedule for every construction project, so consider the size and nature of each job when determining what structure to use.

It’s also a good idea to include a stipulation in your contract that can allow you to suspend the job if payment isn’t made when a milestone is reached. That way, if an invoice isn’t paid on time, it will only be a small percentage of the job cost. Keep in mind that rules and regulations vary by state, so you may want to consult with an attorney to be sure your construction contracts and clauses are compliant with the laws in your area. 

The High Upfront Costs of Starting a New Project

To get a job rolling, contractors often have to lay out a substantial amount of money to order materials, put down deposits, or secure subcontractors. But with rising material prices due to supply chain disruptions from the pandemic, it’s difficult to have the money to get a job off the ground. Prices for steel mill products alone are up 108.6% for the year and general construction input prices are 23.1% higher than a year ago.

Take Precautions Before You Get Started

• Ask for a reasonable deposit

Avoid making the mistake of not asking for a deposit or asking for too small of one. Be realistic about the amount you need and don’t be shy about explaining that you have mobilization costs and purchases to make to get the job started.

• Lock-in pricing with suppliers when possible

Some suppliers will allow you to lock-in pricing and purchase materials now, then have them delivered at a later date.

• Add an escalation clause to your contract

An escalation clause is a provision that protects you by allowing for adjustments to material pricing based on fluctuations in market price.

SBG Funding can help build your construction business. 

Even with the best planning, there are unexpected circumstances or cash flow shortages can pose all sorts of problems. Consider having contingency funds available by securing a line of credit or get access to fast funds to tide you over with a bridge capital loan.

Our construction loans allow you to take on new clients, buy equipment, and keep things rolling while you’re waiting to get paid. We understand the ebbs and flows of the construction industry, and we’re here to provide custom loans to help grow your business.