This article is sponsored by Siteline.

The construction industry faces a persistent challenge: getting subcontractors paid on time. Recent data reveals a stark reality — only 5% of subcontractors report consistently receiving timely payments, with most waiting an average of 90 days to receive funds. This payment delay isn't just an inconvenience, it's a critical business risk that can prevent subcontractors from purchasing materials, paying workers, and securing new projects.

The True Cost of Delayed Payments

The financial impact of slow collections is more significant than many realize. Economic forces like inflation and fluctuating interest rates continuously erode the value of outstanding invoices. Research shows that once an invoice reaches 90 days past due, its value diminishes to just 70 cents on the dollar. What’s more, the longer they remain unpaid, the harder they become to collect. This would definitely help explain why businesses write off around 4% of their account receivables (A/R) annually as bad debt. For a company with $10 million in annual sales, this could translate to $400,000 in lost revenue through bad debt write-offs.

A Proactive Approach to Collections

To combat these challenges, subcontractors can implement a strategic, collaborative collections process. Here are seven critical steps to streamline payments and protect cash flow.

1. Master Contract Review & Negotiations

Contracts lay the foundation for timely payments. Before starting a project, thoroughly review these critical areas to mitigate risk exposure and avoid payment issues:

• Payment terms: Though neither are ideal, push to replace risky "pay-if-paid" clauses with more favorable "pay-when-paid" language.
• Payment application requirements: Understand every detail, from form specifications to submission deadlines.
• Lien waiver details: Familiarize yourself with project- and state-specific requirements.
• Retainage terms: Clarify retention percentages and release conditions.

If any payment terms seem unclear or unreasonable, negotiate terms proactively and propose specific solutions that benefit both parties.

2. Optimize the Payment Application Processes

Develop a precise pay application workflow based on what’s outlined in the contract:

• Use correct forms completely and accurately
• Include comprehensive supporting documentation
• Submit on time through the correct channels

Consider implementing digital solutions that can automate and streamline these critical steps, reducing errors and saving time.

3. Document Every Change Carefully

Always formalize project changes through written change orders. Undocumented work creates financial vulnerabilities and potential billing disputes. Ensure every additional task is properly recorded and approved, and look to software that can track the status of every change order across all projects.

4. Closely Monitor A/R Aging

Regularly review accounts receivable (A/R) data, paying particular attention to days sales outstanding (DSO). This metric helps:

• Identify payment trends across projects and clients to inform future bids
• Recognize which GCs pay the fastest — and which pay the slowest
• Develop targeted strategies for collecting past-due invoices (e.g., an A/R escalation plan)

5. Establish a Robust A/R Escalation Process

When payment delays occur, clients rarely volunteer explanations. But subcontractors can overcome this challenge by implementing a strategic A/R escalation plan to streamline their cash flow.

Hallmarks of effective A/R escalation plans include:

• Immediate response to past-due payments, complete with specific details like invoice number, the amount due, and the original payment date
• Clear follow-up frequency and communication methods to ensure clients are held accountable
• Defined roles and responsibilities for every step of the escalation process
• Team-wide alignment and understanding to ensure nothing falls through the cracks

6. Understand Lien Rights

While filing a lien is a last resort, it remains a powerful tool for subcontractors. Familiarize yourself with state-specific lien filing requirements and consider issuing preliminary notices to set the expectations for timely payments at the start.

7. Leverage Technology Strategically

It’s becoming increasingly difficult for construction businesses to navigate the billing landscape without the right technological solutions. To make your billing and collections workflows even more efficient, look for tools that can:

• Centralize billing and provide a comprehensive view of every pay app’s status
• Automate payment reminders to clients the second a pay app becomes overdue
• Structure collection tasks to support escalation efforts
• Generate comprehensive financial reports for smarter financial decisions

A consistent, structured approach to collections isn't only about getting paid; it's about securing the financial health and future growth of your business. The key is proactively managing collections by implementing these strategies and leveraging the right tools to help you in the process.