In a recent survey, 72 percent of subcontractors say they deal with late payments on at least 40 percent of their projects. Of those, 36 percent say their payments are late 60 percent of the time.
And since the construction industry already suffers from slow payments, averaging 51 days sales outstanding, you’re going to run into serious trouble when those slow payments are pushed further out.
But not all reasons for late payment are external. Sometimes late payments are your own fault. The good news is that fixing internal faults is 100 percent in your control.
How to Stop Late Payments in Construction
1. Understand How to Fill Out Pay Apps
“The first piece of advice I would give to anybody in this field is make sure you understand how to fill out, not only the first AIP pay app, but all subsequent pay apps,” says Roberts. “Not understanding exactly how to fill out sequential pay apps often causes a delay in pay.”
For example, once you’ve submitted the first pay app, you shouldn’t include any of those charges on the next one. Even if those charges haven’t been paid yet.
If you add the unpaid charges from the first pay app to the second, then you have double billed. The pay app will be incorrect, and you’ll have to redo it. Then you’ll have to resubmit it. And suddenly, instead of getting paid in 30 days, it’s now going to take 60.
2. Don’t Be Overzealous With Your Billing
Since payment in construction takes a long time, you might be tempted to pad certain costs in order to stimulate your cash flow.
But you should resist that temptation.
“Subs are always grossly over-claiming how much money they'll have in mobilization, because they know how long it takes to get paid,” says Roberts.”That becomes a big red flag for general contractors.”
When your GC sees an inflated expense like that on your pay app, your pay app will be rejected and sent back to you. And again, you will be responsible for delaying your own payment.
Your pay apps will also be rejected if you bill for materials that aren’t on site yet. No contractor wants to buy materials that are somewhere else. It’s too easy for those materials to go missing or end up being used on someone else’s project.
So, don’t be overly aggressive and bill for things that aren’t justifiable. You’ll only set your payments back further.
3. Do Quality Work
If your work isn’t up to par, no one is going to pay you to keep working. Because legally, they don’t have to.
In fact, one in three contractors say that payment is often delayed because of disputes over the quality of work.
Low-Quality workmanship is often caused by one of these three things:
- Inferior Materials: Sometimes buying cheap materials doesn’t pay in the long run. Be sure to buy materials that are known for their quality and durability.
- Poor Quality Controls: Be sure that you have adequate site supervision and a good quality control system, so mistakes don’t slip through.
- Miscommunication: If the GC says one thing, but you hear another, you’ve got problems. Make sure to ask clarifying questions, and always check the written scope of work.
4. Speed Up Internal Processes
Slow internal processes lead to slow payments. So it doesn't make sense to keep your office systems in the dark ages -- especially when there are so many construction software solutions available today.
Filling out and submitting paperwork by hand is time consuming. It creates opportunities to lose important papers, and often creates double work.
Replacing as many manual accounting processes as you can with digital solutions speeds things up, so you can invoice on time and get paid faster.
Here are a few ways you can incorporate technology into the office and get paid faster:
- Send pay apps electronically: There are online services and apps that give you the flexibility to fill out and send pay apps electronically. This makes it easy to send them in on time. Plus, since it gets to your GC quickly, they can start the approval process faster.
- Automate Payments: The pay app approval process is long. So why add wait time by only accepting checks through the mail? Automate payments with software and get paid faster via ACH transfer, electronic check, or even by credit or debit card.
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Use software to automate workflows: there are so many accounting workflows in your business -- from bidding, invoicing, and getting paid -- that it makes sense to find a software that can connect several functions in one app.
