Aging accounts receivable can hurt any construction business’s financial performance, and if you’ve been in the industry a while, you’ve probably felt it firsthand. Last-minute change orders, hefty retainage, project disputes, and slow approvals all have a way of turning a completed job into a waiting game for payment.
The good news? A few intentional changes to how you manage accounts receivable can make a real difference. Here are six places to start.
1. Consider More Frequent Credit Checks
When you’re assessing a project owner’s ability to pay, your level of due diligence should match the level of risk. Commercial contractors often review credit reports, financial statements, banking relationships, and trade references before agreeing to payment terms. Residential contractors, on the other hand, may lean more on deposits, progress payments, financing approvals, or other signs of financial stability.
Even if credit checks aren’t your usual practice, they’re worth considering for larger jobs or for owners requesting extended payment terms. Look closely at payment history, debt levels, cash flow, and, when possible, references from lenders or other contractors.
It’s also worth reassessing credit risk periodically, even with owners you’ve worked with before. Before starting a new project, or partway through a long-term job, check whether their financial situation has changed.
2. Be Ultra-Clear About Payment Terms
Every contract should include payment amounts and due dates, but don’t stop there. Add language that spells out the consequences for overdue balances, things like late fees or finance charges (where permitted), and the possibility of outstanding debts going to collections. Take the necessary steps to preserve your lien rights promptly, keeping in mind that requirements vary by state.
Consider attaching an addendum that clearly outlines all payment terms and methods, and share it with project owners early, even emailing it directly so they always have it on hand.
Offering multiple payment methods can also boost your chances of getting paid on time. Credit cards, ACH payments, and digital payment apps are all common options. If you’ve invested in an online payment portal, make sure the link is easy to find and shared often.
3. Regularly Refresh Your Invoice Design
When’s the last time you took a fresh look at your invoices? It’s easy to underestimate how much a clear, well-designed invoice can speed up payment. Make sure yours includes:
- A simple but detailed explanation of charges
- Easy-to-find due dates
- Comprehensive payment method options
- The correct web address for your payment portal, if you have one
You might also consider adding early payment incentives, like a 1% to 3% discount, to your invoices. It’s a small gesture that can build the kind of loyalty that leads to repeat business and word-of-mouth referrals.
4. Closely Monitor Payment Patterns
Tracking trends can tip you off early that something in your accounts receivable process needs to change. Keep an eye on metrics like days in accounts receivable (days sales outstanding) and the average time between invoicing and payment. If those numbers are creeping past your standard terms, it may be time to get more proactive with collections.
Pay close attention to the payment histories of owners you work with often. If you notice a pattern of slow payment, consider adjusting their terms, such as requiring a larger deposit on the next job, or stepping up your collection efforts with earlier reminders or a more direct conversation.
5. Formalize Your Collection Policy
Many contractors take an ad hoc, case-by-case approach to late payments. Understandably so, but it can send an unintended message, to project owners and employees alike, that accounts receivable isn’t a top priority.
A written policy changes that. Your process might start with a friendly reminder shortly before payment is due, followed by a written notice once the due date passes. From there, additional steps could include:
- Having an accounting or administrative team member call to confirm the invoice was received and ask when payment can be expected
- Asking a project manager or executive who knows the owner to follow up directly
- Sending a formal past-due notice that cites the payment terms and outlines next steps
For significantly overdue balances, your policy should specify when to pause additional work (if the contract allows), assess late fees, pursue lien rights, or bring in legal counsel or a collection agency.
6. Ask for Help
Accounts receivable are technically an asset, but they don’t do your business much good until they’re converted into cash. That’s where we come in.
We can help you evaluate your current accounts receivable practices, identify opportunities to strengthen your collection policy and processes, and put your financial data to work improving cash flow management. Getting paid shouldn’t be its own major project, and with the right systems in place, it doesn’t have to be.
