Financials and budgeting

Construction payments: Best practices and methods of payment in construction

Graphic of phone showing online payments for construction.

An inconsistent approach to client payments in the construction industry can cause headaches for your finance and accounting teams.

On top of disrupting cash flow, you could be putting yourself at risk for payment disputes and poor customer satisfaction. You could even experience loss of future business from repeat customers or word-of-mouth referrals.

No one wants that.

To avoid these dangers, we’ve put together a list of things to do – and things to avoid – to ensure financial success every time.

Eleven tips for construction payment management

Below, we get into the specifics on how to manage all aspects of processing payments in construction, including the importance of consistency in invoicing, the necessity of offering digital payment methods, why there’s no such thing as over communication with clients and how to spot positive patterns in successful contracts.

Follow these tips to get paid on time and in full.

1. Create a customer agreement

1. Create a customer contract agreement

We can’t stress enough the importance of having a written construction contract.

Before you start any work for your client, have a detailed discussion of your plans, deadlines and suppliers upfront.

As a part of this meeting, talk about money and payment terms.

Be prepared with cost estimates and establish a timeline for when you’ll get paid. Then, lay out your payment draw schedules and have each party sign off on the schedule.

There are many different types of construction contracts. No matter which route you choose, you should be clear about the expected payment schedule.

Putting a clear construction payment schedule in writing also limits the risk you take on as a builder. If your client doesn’t pay, you have a payment agreement letter you can point to if you choose to take legal action.

2. Document all change orders

2. Document all change orders in writing

Once you’ve put in all the work of an agreement, the last thing you want to do is be guilty of a breach.

Life happens. Property owners may be unable to pay by the deadlines you’ve agreed to. Financing may fall through. Loans can hit roadblocks, and delays can happen if banks are busy.

Being flexible as these challenges arise helps improve customer satisfaction. Still, adjustments to a contract should be well documented with a change order or declaration, signed by both builders and clients.

Even if a change order is verbally agreed upon, skipping the step of putting things in writing can put your construction business at risk if a payment dispute comes up. Better yet, use change order software to document change orders, organize details and lessen any risk. Bonus: Buildertrend’s version of this tool does all of this with the added benefit of securing change order approvals 33% quicker.

3. Make homeowner payments easy

3. Make homeowner payments easy

Let’s face it — the building process is easy on no one.

Even after walking through your contract step-by-step with your client, there’s likely to be confusion along the way. Change orders can come as a shock to clients who are new to the home building process. And supply chain issues or rising construction contingency costs can catch even the most experienced clients off guard.

The fact remains that some people are better at managing the details of home construction projects than others. Unfortunately, it’s all too easy for clients to get off track of scheduled payments and you have to repeatedly ask for payment.

Builders can help ensure timely payments by simplifying the billing process.

Recent studies show that 83% of people want to be able to pay their bills online. At this rate, it’s a necessity for you to offer digital payment methods to your clients. Instead of only accepting cash or check payments, expand to include ACH and credit card payments.

There’s more than one benefit to this approach. Besides ease of use, online payment processing can shorten the time it takes to receive the payment. There’s no waiting around for checks in the mail or for cash to trade hands, meaning you can resupply your cash flow faster. Plus, there’s a decreased risk of insufficient funds from your client when you finally get around to cashing their check.

As you make the payment process easy for your clients, make sure the process is working well for you, too. Here are a few tips:

  • Provide different payment options
  • Use tools like digital invoice templates to save time on paperwork.
  • Reduce redundant admin tasks with the use of invoicing software.
  • Create efficiencies where you can so you can spend more time on your clients and their projects.
4. Keep up communication

4. Keep up communication

A communication plan should go hand in hand with the creation of your contract. This identifies who needs to be kept in the loop throughout construction, when to reach out and how to do it. Often, home building involves more than one homeowner, so be clear about which party you’re communicating with. If you only send change orders to one person, but invoices to the other, things can get messy.

If you’ve agreed to keep both in the loop, make sure to do so on every single correspondence. It may feel like overkill, but there’s no such thing as over-communication.

From there, decide when you’ll keep in touch. In some cases, this may be a weekly touch base. Other clients may prefer to hear from you only if there’s an emergency that’s going to impact contingency funds or timeline. Since each plan varies by client, be sure you have a way to send, receive and manage communications – even if you’re on the move or on a job site.

Finally, decide how your clients want to be communicated with. These days, there’s no shortage of ways to get ahold of clients. Instead of bouncing from texts to emails to voicemails, keep all communication within one tool, like Buildertrend’s Customer Portal. With one click into an app on your phone, you can see daily updates as the project progresses, as well as job timelines, messages and even online payments.

Keep in mind, your client communications are just a small part of your overarching communication plan. Be sure to build out regular touch points with every construction manager, subcontractor and supplier.

5. Stick to one invoicing method

5. Stick to one invoicing method

You need to be holding yourself as equally responsible to your contracts as your clients. That means staying on top of your invoicing no matter how busy you are.

The best way to do this is by having a clear understanding of how and when you plan to invoice. Then, put a system in place to manage it.

What do we mean by that? There are three common types of invoicing: line item, flat fee and hybrid. Each requires different billing practices, scopes and requirements.

Some clients (and builders) prefer to invoice by line item. This accounts for cost of materials and overhead cost and bills for them within a detailed invoice as you complete construction. Invoicing by this method helps improve your cash flow, as you’re able to reimburse your expenses more quickly than waiting until full project completion.

Other clients prefer to pay via flat fee invoices. They don’t want to be burdened with a detailed invoice. Instead, they want to make their construction loan draw schedule payments and move on with their lives. A flat fee invoice accomplishes this by outlining the amount due as a lump sum, usually in longer intervals throughout the timeline.

A hybrid construction invoicing approach is a mix of both, and often includes main itemized buckets of direct and indirect project costs. Having a clear understanding of how and when you’ll invoice your customers from the start helps keep things on track.

Pick an invoicing method and stick with it. If you’re invoicing by line item, commit to using cost codes to track everything down to the penny. If you’re invoicing by flat fee, make sure the scope of the project is clearly defined so you can accurately invoice when milestones are met.

6. Double check your invoices

6. Double check your invoices

No matter which invoicing method is agreed upon in the contract, you need to ensure you’re accurately invoicing based upon your contract agreement. This means having systems in place to track material orders and installations, labor, change orders and cost overruns.

Ensure invoicing is accurate the first time you bill your client. If you have to submit invoices to a finance company, make sure you’re doing so by the due date, so you don’t have to wait an extra billing cycle to get paid. And make sure you’re including all the necessary paperwork. If you forget a change order, it might delay your payment even more.

7. Don't forget about your subcontractors

7. Don’t forget about your subcontractors

We’ve guided you through lots of ways to build out your payment collection strategy with clients. But it’s just as important to ensure subcontractor payment plans are in tip-top shape, too.

Especially in today’s busy market, subs are jumping from job to job, and it’s too easy for them to forget to invoice you. You might be thinking ‘why is that my problem’? Well, if your subcontractors get off track in invoicing you, you may end up receiving lots of invoices at the same time.

You don’t want to be on the hook for fulfilling all those payments at once – if you do, your cash flow could take a serious hit. You could also run the risk of your subs trying to take you to court for late payments. Even if you can prove you’re not at fault, no one wants to spend time or money arguing their case.

Create a subcontractor agreement and stay on top of the anticipated payment schedule. If you’re not getting billed when you think you should, speak up. That way, you can keep your construction accounts payable in the black, your subcontractor relationship warm and fuzzy, and your cash flow flush.

An online payment processor, like Buildertrend Payments, makes it effortless to keep subcontractors happy. Instead of chasing down billing, e-checks are sent straight to their inbox – even if your subcontractor doesn’t use Buildertrend. Whether you’re receiving payments or sending them out, processing them with construction invoicing software keeps everything neat, tidy and easy to manage.

8. Improve your construction payment strategies

8. Improve your construction payment strategies

Now that you know what not to do, it’s time to start putting everything together.

First, take a few minutes and look back at your recent contracts. Which were paid on time? Which experienced delays? Are any likely to become repeat customers? Once you know which contracts ran smoothly, identify any patterns you can. Copy those processes into your future contracts. If the success continues, rinse and repeat as you take on new clients.

The same thing goes for patterns of mistakes.

If you see a pattern of missed payments or discrepancies, try to figure out what went wrong.

If it was due to an error with a billing cycle, move up your deadlines so you can submit your paperwork sooner.

If you spent time correcting invoices for clients, invest in a system that syncs with your accounting program. That way, you’re always operating off of reliable data.

If payments were held up due to delays or bounced checks, launch an online payment processing tool.

9. Reward early payments

9. Reward early payments

Rarely do contractors reward early payment, but why not? You’re in charge of how you invoice and this is a smart business decision to consider.  

When, and only when, the homeowner pays does everyone else get paid. Payment incentives can motivate clients and create positive cashflow. Offering a discount on early payments encourages clients to pay ASAP. Set this early payment incentive in the contracting phase.

You may be wondering why you’d agree to a lower price, but you need to consider how much money you’re losing each day an invoice is late. With early payment incentives, you’ll save money every day you’re not carrying the bill.

Discounted prices billing means happy clients and positive cashflow for you to get started on your next project.

10. Be prepared to file a lien

10. Be prepared to file a lien

Just like early payment rewards, late payment fees must be clearly outlined in the contract.

That said, late payments on invoices are common in the industry and need to be penalized. Be sure to clearly set a fee for late payments in the contract and restate this information on each invoice. Nobody wants to charge extra fees, but late payments cost you money so somebody has to pay.

It’s important to monitor late due dates closely — unpaid bills are lost investments.

The hope is that late fees will push homeowners to pay (and maybe in full), but once late fees have been issued and bills are still not being paid, it’s time to file a lien. This is referred to generically as a mechanic’s lien or a contractor’s lien — which is a hold against your client’s property.  

Before filing a lien, be sure you have documentation of your invoices, notices of late payments and the outstanding bill amount. It’s important to know your state deadline for how many days you have to file a lien from the last day of work. In some states, you must file a lien within 120 days of your last day of work and you must submit to your clients within 10 days of filing.  

When clients are not paying, taking a lien is necessary for the health of your construction company. Liens are available tools in your toolbelt. Use them when necessary.

11. Expect payment delays

11. Expect payment delays

Stuff happens that is out of your control. By stuff we mean change orders, supply delays, worker shortages…

Be sure to have a clear process to follow-up on late invoices, but don’t let your time be monopolized by chasing those late payments that cannot be paid. Because of the chain of payment, late payments happen in construction and you have to plan for them.

Remember, we’re not talking about a client who isn’t paying their invoice, we are referring to something higher up in the chain that’s out of your control. If possible, it’s important to have a cash cushion to protect you if there are unforeseen payment delays.

How Buildertrend improves construction payments

Improving your payments strategy may seem like a lot of work. However, it’s easier than you might think — especially if you put tools in place that can handle both client and contractor payments.

Getting paid is a quick two-step process.

Step one, invoice your client using the line item, flat fee or hybrid invoice format described in the invoice section above. Step two, email the invoice directly to the homeowner through Buildertrend Payments. The homeowner will pay through a link using the payment method of their choice. That’s it.

It’s just as simple to pay subs and vendors. First, they will choose a digital or printed check. Second, digital checks will be emailed and physical checks will be printed, posted and mailed. The best part? This is all done automatically for you. 

Buildertrend Payment Processing lets you track what you’ve already billed versus what the invoice reflects. You can also create invoices directly from estimates and change orders.

When clients and subs log into Buildertrend, they’ll be able to track the budget and schedule. Clear communication with clients and subs leads to a better customer service experience.

Clients crave transparency in the payment process. Ultimately, we all know that happy clients will bring you more business. Using a construction payment software is a win-win for payment management.  

Let Buildertrend help ensure your payments strategy sees success.

Construction payment FAQs

The construction payment process starts with the homeowner who pays the general contractor who then pays the subcontractors and finally these subs pay their suppliers. Getting the homeowner to pay invoices on time is vital to ensure all payments run hassle-free down the line.   

There are a number of different construction payment terms. Typically, construction payments are due 30 days after an invoice. The flow of who gets paid when and whether or not a retainage is used are all up to the builder. Here are a couple items to consider:

  • Prepayment: Prepayment is required so contractors can secure materials, equipment and a crew. A typical prepayment runs about 20-33% of the job. 
  • Net 10, 30 and 60: A net payment means payment is due 10, 30 or 60 days from the date of the invoice.
  • Pay-when-paid: This is a common clause in a contract that means the subs on the job will get paid when the homeowner pays the general contractor.
  • Retainage: When a general contractor withholds a percentage of a subcontractors payment until the job is finished.

The most common type of construction payment is a net payment, meaning the invoice is due a set amount of days from the issue date. For longer projects, it’s typical to pay an upfront deposit and then to pay the contractor monthly until the job is finished.    

The most efficient way to manage construction payments is by using a construction payment software such as Buildertrend Payment. Why? Because it takes the awkwardness out of asking for money. A written construction contract should clearly state the expected payment schedule. Once you have that contract in place, your clients will pay all invoices via email. No emails or phone calls begging to get paid.

About The Author

Meghan Townley Meghan Townley is a freelance copywriter for Buildertrend.

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