7 Tips to Manage Payment Processes and Improve Cash Flow in Construction Projects

Cash flow is more than just cash in and cash out. It’s about having enough money in the bank to pay your expenses on time and ensure you remain profitable for any given project. Construction cash flow management is particularly affected by slow payments from clients, companies floating cash for materials and labour, and negative cash flow risks.

It doesn’t have to be this way. With the right cash flow tips for construction, you can improve your payment processes to speed up invoicing, enhance profitability, and boost your positive cash flow. Here’s how;

Cash Flow Tips for Construction

1. Set Clear Payment Terms
2. Invoice Promptly
3. Implement Milestone-Based Payment
4. Use Construction Accounting Software
5. Negotiate Supplier Terms
6. Offer Flexible Payment Options
7. Evaluate Client’s Creditworthiness

1. Set Clear Payment Terms

One of the biggest hurdles construction companies face is late payment from clients. If your positive cash flow depends on receiving an invoice on a particular date, failure to receive the payment can ripple forward, causing significant issues.

Your initial contract should outline clear payment terms. That could include requesting deposits, structuring payment progress, and even offering discounts for earlier payments.

Your deadline must be strict. If you wish, you can detail penalties for missing payment deadlines to incentivise clients to pay early or on time.

2. Invoice Promptly

Prompt invoicing is one of the simplest yet most effective ways to ensure positive cash flow. The earlier you send an invoice, the more time a client has to complete it. When a milestone or project is completed, send the invoice within a day or so. The client is likely occupied with the project, increasing the chance they pay sooner. You can also increase the number of follow-ups you send before the payment becomes late.

Ideally, your accounts receivable should be 30 days or fewer, although this can often be longer in the construction industry. Don’t be shy about asking for a payment if the project is completed and signed off, you’re legally due your payments. It’s the client’s responsibility to ensure that happens.

3. Implement Milestone-Based Payment

Relying on clients to pay one big lump sum at the end of the project carries significant risk. By this point, your company is on the line for all the materials, labour, and other expenses incurred. A missed or delayed payment can cause havoc to future projects.

Milestone payment systems split the final cost into manageable chunks. These chunks are paid after each stage is completed. The benefits are obvious. You maintain a positive cash flow, allowing you to recuperate costs before moving on to the next stage. It’s a significant payment process improvement.

4. Use Construction Accounting Software

Constructing accounting software (like 4PS Construct) centralises your invoicing, account tracking, expenditure, and more in one central location. You can send invoices automatically when milestones are reached, track payments, and schedule expenses. With real-time financial insights, you can monitor project profitability, identify trends, and reduce manual errors.

With everything in one location, it’s easier to forecast your inflows and outflows. It’s the ultimate tool for construction cash flow management. You’ll receive warning signs when cash flow issues are forecasted, letting you plan ahead and take proactive measures to maintain financial stability and avoid project delays.

5. Negotiate Supplier Terms

Supplier relationships are crucial for construction companies. That’s not just about getting better deals but also managing project payments. A great supplier relationship gives you the freedom to extend payment deadlines while prioritising your income flows to maintain positive cash flow.

Building trust with your suppliers can also lead to additional benefits, such as access to exclusive deals, priority on material availability during shortages, and flexible credit terms. However, you can’t extend it endlessly. Suppliers expect payment on time for most orders – otherwise, you risk jeopardising a long-term partnership that could bring greater discounts and relaxed payment schedules.

6. Offer Flexible Payment Options

Take a lesson from the retail space: the easier it is to pay, the more likely the client is to do so. Restricting the payment options can affect timely payments. However, give clients a choice between several options, and you might find payments sitting in your company bank account long before the deadline.

Potential options include;

• Bank transfers
• Credit or debit card payments
• Online payment platforms (e.g., PayPal, Stripe)
• Cheques
• Cash payments
• Financing options through third-party lenders
• Retainer or deposit upfront
• Direct debit for recurring payments

For smaller, one-off payments, you might even offer mobile payment apps, such as Apple Pay or Google Pay.

You don’t have to offer all of these options. But, providing customers with their preferred payment options is the simplest way to help them pay. Don’t make it difficult to receive payments – remove all the barriers and obstacles.

7. Evaluate Client’s Creditworthiness

It’s always worthwhile taking the time to look into your client’s history, as they may have a track record of missed or late payments, poor internal cash flow, and a tardy attitude to invoices. Avoiding these clients is the best way to optimise your construction finances.

Ask a credit agency to evaluate the client’s creditworthiness. Are they capable of paying your invoices when they say they will? Determining the risk of missed or late payments ahead of time is the secret to minimising the risk after the project begins.

4PS Construct is a trusted leader in construction cash flow management, providing innovative tools to streamline payment process improvement and enhance financial visibility. Our platform integrates procurement, invoicing, and cost estimation, offering actionable cash flow tips for construction businesses. Daily reports keep you on track, ensuring efficiency in managing project payments and maintaining financial stability.

Download our whitepaper, ‘7 Proven Strategies to Maintain Positive Cash Flow in Construction,’ for expert insights.

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