Construction accounts payable & how to improve it

There are so many ways accounts payable can go wrong for any business.

Duplicate payments. Data entry errors. Unauthorized purchases.

No matter what industry a company is a part of, the list goes on. In construction, though, the stakes are higher. With multiple subcontractors, suppliers and vendors providing services and goods for a project, construction companies typically have to sort through a high volume of expensive invoices – often at the same time.

With these big-ticket liabilities on your books, your construction company needs a fine-tuned accounts payable construction system to ensure your expenses are being paid accurately and on time, without draining your bank account.

What are accounts payable in construction?

In accounting, accounts payable refers to money a business owes other parties for goods or services received. In construction, it’s common for a contractor to have active accounts payable due to suppliers, subcontractors and vendors on a constant rotation. Some examples of open payments include:

• Materials
• Equipment
• External labor and services
• Permits and fees
• Utilities
• Insurance
• Rent

The importance of effective construction accounts payable processes

In construction, the management of accounts payable is critical in fulfilling financial obligations. If outstanding payments fall past due, suppliers and vendors could hold further shipments of materials and equipment, or subcontractors could withhold service completion until payment is made.

Here are several reasons why it’s important to maintain an effective accounts payable process so that all expenses are paid accurately and on time.

Managing supplier relationships

Suppliers are responsible for ensuring a steady supply of materials and services to your projects. Without payment, they can stop equipping your project with necessary materials for completion.

Ensuring timely payments

Timely payments help build trust between project stakeholders. Without trust, subcontractors or vendors may choose to exit a project or withhold further services until payment is complete.

Cash flow management

When payments fall past due, it can bottleneck financial resources needed to fulfill future expenses.

Accurate financial reporting

When accounts payable is inaccurate, it can affect your entire business’s financial outlook, creating a threat to long-term profitability.

Compliance and audit readiness

Inaccurate accounting can result in compliance risk. Penalties can even be handed out if audits uncover regulatory mistakes. 

Fraud prevention

Without a well-managed accounts payable system, someone could authorize a fraudulent payment, and you wouldn’t know about it until well after the fact.

Cost control and efficiency

If you’re always playing catch-up with your expenses, it can be difficult to identify cost-saving opportunities or maximize business growth.

How does the construction accounts payable process work?

Regardless of the size of your construction company, it’s important to have a fine-tuned accounts payable process. When approached manually, accounting records can quickly become inaccurate, which can lead to missed payments and errors.

Although your specific processes may vary based on the size of your office team and the frequency of your payments, you can simplify construction accounting with a nine-step AP process.

Step One: Complete purchase orders

During the procurement process, a construction company creates a purchase order (PO) that includes details of the purchase like quantity, price of items, delivery and payment terms. For example, the PO may detail the order of 100 bags of cement at $10 per bag – with a total value of $1,000 – to be delivered within two weeks.

Step Two: Receive invoice

After the delivery of goods or services, a subcontractor, vendor or supplier then invoices the construction company for the total expense due.

Step Three: Verify accounts payable

When the construction company receives the invoice, they match it against the corresponding PO. This ensures that the invoice aligns with the agreed-upon terms and quantities.

Step Four: Record in the accounting system

Once the invoice is matched and approved, the individual responsible for processing accounts payable records the liability in the accounting system. This includes capturing important details such as the subcontractor or vendor’s name, the invoice number and date, and the total amount due. If the company uses software with a job costing feature, this is typically the step where the expense is recorded and allocated to specific construction projects.

Step Five: Schedule payment

Depending on the agreed-upon terms of the PO, the construction company may choose to process payment immediately or wait until a later date. For example, many terms allow payment to be fulfilled up to 30 days from the invoice date. If that’s the case, a contractor may choose to delay payment for a few days to measure and optimize cash flow.

Step Six: Process payment

At any time within the acceptable payment window, a construction contractor may process payment. For those who use construction company software, this step occurs after an invoice has been matched with a PO and the invoice is pushed through to integrated accounting software.

Step Seven: Authorize payment

Before the payment is made, many companies require it to be authorized by someone else within the business. This way there’s a checks-and-balances system ensuring no fraudulent payments are occurring and no all-required documentation is completed.

Step Eight: Request lien waivers

If applicable, upon making payment, a construction company may request a lien waiver from a subcontractor, vendor or supplier. This ensures that the paid party confirms receipt of payment and waives their right to file a lien for the specific payment made.

Step Nine: Reconcile and report

After payment is complete, the construction company must reconcile the payment against its accounting records. Using this data, the company can gain an accurate understanding of its financial obligations.

Common challenges in construction accounts payable

Accounts payable in any business has a direct correlation to a healthy bottom line. In construction, that’s even more true, as each outstanding invoice is often a high-dollar sum. Without efficient accounts payable processes in place, construction companies can quickly experience cash flow imbalances that lead to stalled projects.

Be on the lookout for any of these common challenges that lead to risk in your accounts payable.

A high volume of invoices

The sheer number of invoices construction companies field is extreme. That’s because builders are often coordinating with multiple subcontractors, vendors and suppliers. Factoring for multiple builds happening at once, it’s all too easy for accounts payable paperwork to pile up.

Complex payment terms

Construction projects often involve multiple payment terms, as each supplier, subcontractor and vendor may have different requirements. Navigating these deadlines can be difficult – especially if you’re manually tracking each PO and invoice.

Project-specific billing requirements

Just as payment terms can vary, each project may have different invoicing and billing needs. This can include specific billing formats, documentation requirements and invoicing schedules. Because each contract is unique, billing requirements can be tailored to the specific scope, timeline and progress of each project. This can mean even more complexities – and work – for your team.

Discrepancies and disputes

Differences in invoices, pricing or delivered materials can lead to payment disputes, which can impact cash flow and project process.

Manual processes and paperwork

Relying on manual processes for data entry and paperwork can be time-consuming, prone to error and inefficient. This is true for construction companies of all sizes, but especially in instances where contractors wear multiple hats and take on the bulk of accounting responsibilities themselves.

Supplier and subcontractor relationships

Maintaining positive relationships with suppliers and subcontractors is essential. Any delay or issues in accounts payable can strain these relationships. Especially when the market is experiencing a shortage of subcontractors, it’s critical to pay subcontractors on time and accurately to ensure your overall project progress stays on track.

Fraud and security risks

Accounts payable processes can fall victim to fraud, especially when there isn’t a checks-and-balances system for payment authorization in place. This can lead to financial loss and compliance risk, which can also affect business reputation.

Record-keeping and audit preparedness

Ensuring accurate record-keeping is crucial for financial reporting – and audit preparedness. Inadequate documentation can lead to compliance challenges and potential penalties.

How to improve accounts payable with construction software

Accounting is complicated. There’s a reason large companies often dedicate an entire team to managing accounts payable within their accounting departments.

The first step to uncomplicating it is to pivot from spreadsheets and manual processes toward digital tactics and automated workflows. This is where construction software – especially one with a ready-built integration and construction accounting software two-way sync – can deliver. 

Invoice processing automation

Construction software can automatically capture and process invoice data, reducing manual entry and human error.

Streamline approval workflows

Digital approval workflows equal faster invoice approvals. This supports construction payment best practices such as timely authorization and prompt payment.

Enable electronic payments

Construction software can facilitate online payments, which simplifies the payment process. This reduces paperwork while helping you pay your subs faster and more efficiently.

Integration with purchase order system

By integrating accounts payable with a PO system, you can seamlessly match invoices with corresponding POs. This helps minimize discrepancies and disputes.

Real-time visibility and reporting

Construction software offers real-time visibility into accounts payable data, providing valuable insights for financial reporting, forecasting and data-driven decision-making.

Document management

Centralized document storage makes it easier for all project stakeholders to manage and access documents. This includes invoices and financial documents.

Enhanced integration with accounting systems

A seamless integration with accounting systems ensures accurate shared data. As many accounting systems also process payments (or integrate with an additional third party to process payments on your behalf), this also means less work – and headache – for your accounts payable team.

Audit and compliance readiness

Construction software helps support compliance. Through the maintenance of accurate records and financial documentation, you can ensure you’re ready in the case of an audit.

Training and support

Many software vendors offer training to help your accounts payable staff learn initial tips and tricks within the tool. Buildertrend takes this one step further, offering multiple forms of continued support and education to make sure you’re getting the most out of your construction management software.

Optimize your construction accounts payable with Buildertrend

Construction company software plays an important role in supporting accounting processes – especially accounts payable.

By leveraging Buildertrend’s financial management software, construction companies can improve efficiency and ensure bottom-line accuracy. Some features that help support this include:

1. Purchase order software

Integrating purchase orders alongside your accounts payable process streamlines the entire procurement process. It ensures accurate expense management while minimizing errors and incorrect payment authorization.

2. Materials management and purchasing programs

Buildertrend offers an in-built construction materials management feature, which makes it easier for you to buy materials at the best price and provides protection from supply chain disruptions.

3. Rebate tracking and management

To maximize cost savings, Buildertrend’s construction company software helps track and manage supplier rebates for bulk purchases or special deals. By optimizing rebate management in the accounts payable process, you can lower overall project costs.

4. Online payments

Online payment processing isn’t just a beneficial way for builders to collect payments from clients. It also offers a seamless way to fulfill open balances with your subcontractors and vendors. Online payments also reduce paperwork and streamline payment authorization – meaning you can zero out your liabilities faster.

Construction accounts payable FAQs

Get answers to the most common questions about the accounts payable process in the construction industry.