Guide to cash flow management: Getting your construction company paid faster

Guide To Cash Flow Management Getting Your Construction Business Paid Faster

Cash flow management

Having a healthy cash flow is the cornerstone of any successful Australian trades services business. Unfortunately, for most construction companies, delayed payments or non-payments after a project are the norm. Compounding that problem is the financial uncertainty caused by the COVID-19 pandemic, which has postponed many construction projects. These have detrimental effects on a construction contractor who needs to make up for overhead costs, equipment expenses, and ongoing payroll. 

Construction companies therefore shouldn’t expect to get paid on time just because they did an excellent job. Instead, they have to learn how to navigate the complex world of client agreements and invoice processes. Here are some useful tips for effective cash flow management that you need to know:  

Understand local payment regulations

Due to the financial risks involved in construction, knowing the laws that protect your right to payment is especially important. Every state in Australia has specific regulations that ensure your business is paid fairly and on time for your work. In New South Wales, construction companies are supported by the Building and Construction Industry Security of Payment Act 1999. Meanwhile, Queensland-based construction companies are governed by the Building Industry Fairness (Security of Payment) Act 2017.  

Although regulations differ from state to state, they generally offer several forms of protections, including: 

  • Guidelines for minimum interest rates on late payments
  • Rules prohibiting pay-when-paid clauses between general contractors and subcontractors
  • Authority to make claims for progress payments at regular intervals and set maximum periods of time for clients to respond to said claims
  • A statutory right to claim lump sum payments if clients fail to respond to progress payment deadlines  
  • Maximum payment terms in construction contracts (e.g., 15 business days after a payment claim is made by head contractors to project owners in NSW)
  • Judicial right to suspend work if the business hasn’t received payment 

By understanding the regulations that protect your business, you’ll have legal leverage with clients when it comes to payment. This, in turn, will allow you to recover payments promptly without the rigamarole of constant back and forth with clients. 

Compose detailed contracts

Well-written service contracts that cover payment terms and conditions go a long way in ensuring clients pay as promised. Your contracts should show clients the scope of the job, the payment schedule for each project milestone, and the possible legal repercussions for delayed payments.  

In most cases, you can deter delayed payments by specifying late fees in your contract terms. Many construction companies include a percentage penalty fee if clients fail to pay within a specified number of days after they’ve received the invoice. Some will even incrementally increase the penalty fees the longer the client delays their payment past the deadline. You can also set contract conditions in which you halt a project if clients miss invoice due dates after certain milestones. 

Offering discounted rates for early payments is another element you can add in your contract. By incentivising early payments with a reward, clients will be more inclined to send checks on time. As long as the deals you offer don’t eat into your revenue, you can provide a contract that improves your cash flow and customer relationships. 

Straighten out your invoices

A misplaced decimal point or miscalculation will likely throw your clients for a loop. Knowing that there’s a mistake, clients will send back the invoice, which ultimately delays payments. Plus, continuously sending incorrect invoices tarnishes your relationship with the client. 

As a general rule, your invoices must be organised, intuitive, and have all the bases covered. It should include the client’s name and address, your company’s details, and the date of the invoice. The invoice needs to clearly state payment terms and an item-by-item description of the work completed. Finally, exact quantities of materials used, billable hours, and total costs should be reflected on the cost sheet. It also pays to have a precise record of labour data, price lists, unit costs, and daily project expenses so you can accurately calculate the markup for the entire job. 

Leverage modern invoicing and payment tools

Manual invoicing and payment approval processes not only take a lot of time, but they’re also extremely error-prone. When staff are keeping track of financial transactions through simple spreadsheets, they can easily overlook overdue payments or invoice the wrong people the wrong amounts. The most effective way to avoid all this hassle is to utilise advanced accounting and job management platforms. 

For example, WorkBuddy integrates with account systems like Xero, QuickBooks, and MYOB Online to expedite tedious invoicing processes. With this integration, you can track job progress and expenses in real time and automatically generate invoices on site. The aforementioned accounting systems offer secure electronic payment methods to make payment as seamless as possible. You can even automate payment reminders to clients so you get paid on time while freeing up your administrative team from following up with outstanding invoices. 

If your construction company is tired of dealing with delayed payments, we can give you the tools for a healthier cash flow. Request a free demo today to see how WorkBuddy and your favourite accounting software can set your business up for success.

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