How Do You Invoice to Prevent That?
Construction companies shouldn’t get paid just when they finish a job, especially if it’s a big one. They should get paid because they invoice correctly. That’s why a Payment Application is one of the most important business tools you can have.
Progress payments are often received after the completion of a predetermined stage of work, such as demolition, concrete, framing, roofing, or siding. These installments replace a single lump-sum payment at the end of a project or a “half upfront, half at the end” arrangement.
Payments tied to the completion of a specific stage of work can create confusion. For example, does the concrete stage include sidewalks and garage approaches that may not be completed until later in the project? Questions like this can lead to inconsistent and inaccurate payments.
Payment Applications can also protect construction companies if a customer falls behind on payments during the project. At Timber Creek Construction, we include a delay clause in our contract that allows us to stop work if a progress payment is not received promptly.
Construction companies aren’t banks and shouldn’t be expected to finance a customer’s project.
At Timber Creek Construction, we choose to base our progress payments on periods of time rather than stages of work. We determine how much work has been completed during a predetermined period and invoice accordingly.
The Payment Application is an Excel spreadsheet used to track progress payments on construction projects, but it is much more than a simple invoice. It includes individual values based on the proposal and the specific items included in the scope of work.
Communication between construction companies and customers is one of the biggest challenges in the construction industry. A Payment Application helps set financial expectations so customers know what to expect before the project begins and throughout the construction process.
A Payment Application shows the customer the total project price broken down by individual items. It tracks the amount currently being invoiced, what has already been paid, and what remains to be paid. This document is provided to the customer with each invoice.
Benefits of progress payments include:
- Stable cash flow – Progress payments provide construction companies with a steady stream of income, reducing the amount of working capital needed for projects. This makes it easier to cover material and labor costs throughout construction while minimizing the need to borrow money.
- Increased motivation – Reaching the next payment milestone can be a great motivator. Getting paid throughout the project can also encourage productivity, help control material and labor costs, and ultimately increase profits.
- Fewer payment problems – Progress payments establish a consistent expectation for when payments should be received. If payments begin arriving late—or stop altogether—it may indicate the customer is experiencing financial difficulties. Catching those warning signs early can help prevent larger problems or even legal action later.
- Opportunity to pause the project – If a customer fails to make a progress payment for completed work, you can choose to pause the project until the issue is resolved. It’s much better to address payment problems before the project is complete than after it’s finished.
One common pushback to progress payments is the extra paperwork they require.
Most builders don’t enjoy paperwork, but they need to make sure they get paid. Few construction companies have a dedicated accounting or finance department to handle these tasks, which means the responsibility usually falls on the office staff or the contractor himself.
The goal isn’t to create more paperwork. The goal is to create a system that helps you get paid on time, improve cash flow, and spend more time building instead of acting like a bank.
Next week we’ll look at the specifics of the Payment Application and how the tool works.
Watch for the Payment Application to be added to the Business BUILDing Toolbox soon.
In the meantime, check out the tools already included in the Business BUILDing Toolbox, or schedule a 30-minute meeting if you have any questions.