You started your construction business because you love to build—not to spend all afternoon at your desk or chasing paper checks. But getting paid on time is critical to your business' success.
In the construction industry, it's common to feel that managing invoicing and payments is taking away from your projects or sales. But if you stick to a process and make a small investment in the right tools, getting paid on time can take just minutes each week.
1. Define billing & payment terms upfront
When you're bidding on a project or signing a contract, it's important to establish clear a billing process, payment procedures & payment terms. Traditionally, there are three types of invoicing used in the construction industry. Choose the right invoicing & billing process for your business and the job:
- Progress: often used on larger projects, with subcontractors, or in commercial construction. Invoice for percentage of work completed according to a schedule of values.
- Milestone: often used by residential general contractors. Establish a clear payment schedule with milestones (e.g. “Demolition complete”, “All rough plumbing and electrical complete”) that have set dollar values.
- Time & materials (cost plus): often used in smaller residential projects or on high-end custom homes. The contractor must account for all labor costs & material costs and charge a markup on top of that. Upon each invoice, the contractor must sent a detailed breakdown of all costs along with the receipts associated to each expense.
If possible, avoid time & materials to improve your cash flow. The administrative burden is high, so it's mainly useful when the project scope is hard to define or you can't easily estimate the cost to complete the project. (Interested in learning tips to improve your cash flow? Click here)
Then, make sure you're clear about when payment is due. In residential, it's common to require payment within days of invoicing. In commercial, it's common to expect payment 30-90 days after invoicing.
2. Invoice according to your estimate and change orders
Stick with the original language, line items, and project milestones in your estimate. Consistency is crucial to a streamlined payment process.
- If you’re sending a progress invoice, use a format like the AIA G702 / G703 to provide a clear picture of the work completed, balance to finish, and retention held. Add change orders as new lines on your schedule of values.
- If you’re sending a milestone invoice, use the same milestone description and amount from your estimate. If there were any change orders, include them as separate lines or in a separate invoice.
- If you’re sending a T&M invoice, break down expenses by labor, materials, and subcontractor costs. Attach time sheets, receipts, and bills to the invoice. If you had an original budget, consider sharing your progress against that budget.
3. Include backup, lien waivers, or evidence of work from the start
Avoid timely back-and-forths by sending all of the required documentation upfront. If your client requires lien waivers, make sure they are signed and attached. If you anticipate questions about work progress, include photographs or videos of your work. If a certificate of insurance is close to expiring, send an updated certificate.
4. Send invoices over email and accept online payment
Don't send text messages or ask for payment over the phone. Send an email to the client with a customized invoice and any relevant attachments.
Use construction payment software, like Beam, to securely accept online payments on a client portal. Paper checks are insecure, slow, and make payment reconciliation more difficult. By switching over to an online payment platform, it allows your customers to have a few payment options, such as ACH transfer or credit card.
If your invoice is past due, send a friendly reminder email, reminding your client that prompt payment is important for your business and helps the construction project move faster.
5. Use software to track unpaid invoices, client interactions, and payments
Don't rely on your memory or spreadsheets to stay on top of payment. Software can help you track unpaid invoices, save contact details, send reminder emails, and even track your clients' interactions with emails and payment portals. Using software can help reduce late payments/late invoices and increase the likelihood of receiving timely payments.
6. Include payment history or use a client portal
Your clients may not remember past invoices or payments as well as you. Make it easy for them to approve and pay your invoice by providing information about past invoices or payments.
- Progress invoices include previous work completed, past payment amounts, balance to finish, as well as new change orders
- Milestone invoices may not contain all past payment history, so consider offering a way to view or download all past invoices, change orders, and payments. Construction software, like Beam, may offer client portals with all of this information
- T&M invoices don’t normally contain past payment history, but consider including your progress against an original budget and offering a client portal where they can see all past invoices
7. Record invoices and payments in accounting software for tax season
Don't find yourself in April with messy books that take thousands of dollars for a CPA to process. Make sure your detailed invoices and payments are recorded in accounting software like QuickBooks Online from the start so you aren't overpaying taxes or getting hit with a huge bill from your accountant. This will also ensure you're keeping an accurate record of all transactions in your accounting software.
Most construction invoicing software, like Beam, integrates directly with QuickBooks to automate data entry and avoid expensive bills from a CPA.