February 2019

Construction Contractors Can Get Paid Faster by Doing These Three Things

5 minute read

If you're a construction contractor, you've no doubt struggled with shortcomings in payment collections, late payments and unpaid construction liens. According to a new report from American Express and EY, managing cash flow remains a challenge for general contractors and their subcontractors. Thanks to new legislation and increased efforts to streamline the processes that can expedite payments, however, relief—and cash—could be within reach

Understanding new construction payment legislation

Under the Ontario Construction Act, it is the responsibility of the payee to issue an accurate invoice in a timely manner. The law deems that owners must pay their prime contractors within 28-30 days of a correct and accurate invoice receipt, who in turn must pay their sub-contractors within seven days. Other provinces are also implementing their own prompt-payment legislation.

If the general contractor (GC) cannot pay because the owner has not yet released payment, the GC can issue a “Notice of Non-payment" to the subcontractor. If the contractor has other reasons for not paying the subcontractor and issues a Notice of Non-payment detailing those reasons, the subcontractor has a right to take the matter to adjudication, reducing the industry's reliance on construction liens and litigation.

“In my view, the ultimate point of the legislation is to change the culture. That's what we want—the cultural change where everybody works together and cooperates," explains Paul Raboud, Director of the Board at Bird Construction, in the report. "A formally structured litigious construction environment does not promote efficiency."

While it may take years for the Canadian construction industry to embrace a culture of cooperation, there are some steps contractors can take now to limit litigation, get paid faster and improve cash flow.

Emphasize education and awareness of the new construction laws

Experts are unsure whether the new legislation will affect cash flow and billing cycles for contractors, but at the very least, it opens doors to discussion about faster, more efficient accounts receivable. Construction contractors and their accounting departments should first ensure that everyone in the supply chain understands the new legislation.

One significant change involves timely invoicing. Contractors are expected to invoice promptly and accurately, with the expectation that owners will pay their bills within 28 days. Integrating project managers into the invoice and collections process may help by personalizing the tasks, rather than leaving accounts receivable only in the hands of the accounting department. Open and honest discussions about invoices between project managers and owners can potentially clear up any confusion about payment terms.

Analyze internal processes to make improvements

In addition to giving contractors the means to collect unpaid invoices through adjudication rather than turning immediately to litigation, the new legislation seeks to encourage efficiency when it comes to billing.

The same firms that wouldn't even consider missing construction deadlines, except in the case of extreme extenuating circumstances, may not treat accounts receivable with the same care. They might leave unsent invoices on their desks (or, more likely, virtual desktops) for months, fail to invoice when a project is complete, or hesitate to send reminders about unpaid invoices.

Improve efficiency by establishing processes for invoicing as soon as work is complete. Timely invoicing can minimize Days Sales Outstanding, closing the gap between project completion and getting the invoice in queue toward payment.

Streamline workflow by ensuring that designs, documentation, pick lists and change orders are accurate upon project completion, so that invoicing will be based on the correct parts and labor. Read the fine print of the contract to deliver the invoice in the client's requested format. It may even be possible to have owners pre-approve invoices to minimize payment delays.

Implement technology to expedite payments and improve cash flow

Finally, construction contractors can improve efficiency with the right technology. Setting up digital payment methods can make it easy for payees and payers to invoice and pay on time. By pre-scheduling payments, owners and contractors can better manage cash flow.

The use of a corporate credit card or a virtual payment system can also help streamline the payment process. You can manage cash flow effectively by scheduling payments to go out on their due date or at a specified date following receipt of the invoice.

Virtual payment solutions can streamline the payment and reconciliation process, adding layers of security with virtual account numbers and specific controls for each transaction.

Credit cards and charge cards allow you to earn rewards for your purchases, which can be used for employee rewards or business travel. By taking advantage of credit card interest-free days, you can pay your contractors on time but keep cash in your account for up to 55 days* after your credit card payment.

Adopt a collaborative mindset with your supply chain to improve cash flow

When you establish efficient processes and get project managers working in tandem with your accounting department, you'll set the wheels in motion for faster payments.

Invoicing should be viewed as the final phase of every project, after walk-through and clean-up. Rather than approaching payments with a confrontational "us vs. them" mentality, contractors can work with owners to implement the fastest, easiest payment methods.

A paradigm shift in philosophy can play a major role in solving the payment struggles of the construction industry while improving your company's cash flow for faster business growth.

* As a charge Card, the balance must always be paid in full each month in which no interest charges will apply. The interest free grace period is 28, 29, 30 or 31 days from the closing date of the current statement to the closing date of the next statement depending on the number of days in the calendar month in which the closing date occurs. The number of interest free days varies based on a variety of factors, including when charges are posted to your account, whether your account is in good standing, and the closing date of your statement

This article contains information in summary form; it is intended for general informational purposes only and does not constitute legal advice or an opinion on any issue. It should not be regarded as comprehensive or a substitute for professional advice.