Since cash flow is the key to a contractor’s success, construction companies cannot afford the billing expenses. In order for the money to keep flowing, contractors need to issue invoices in a timely manner with invoices that clearly show what is due when – to reduce disputes and get payments faster.
Basics of construction billing
What makes a construction bill?
The construction invoice formally requests payment of a specified amount from the customer. As a result, it also includes payment terms, including the due date and any discounts. In this way, the invoice differs from the quotation. A quote provides customers with an estimate of what they may owe for the work to be done. An invoice means that the contractor is owed for the work done – even if it hasn’t been due for 30 days or more.
The construction bill usually consists of :
- Contractor company name and contact information
- Customer’s name and contact information
- Invoice date
- Due date(s) for the amount(s)
- Brief description or clear line of goods or services
- Quantities (such as units and hours) and prices of goods or services
- Payment Terms
With all that said, do I have to write an invoice? Is there such a thing as an “oral bill”? While contracts may be concluded with a handshake, requests for payment must be clearly documented and dated in order to protect the contractor’s right to collection.
Example of a construction invoice
Not sure how to get started with your own professional billing? Preview a sample construction invoice below.
To customize the form and make it your own, click on the link below, and select File from the top left menu bar. Then select “Create a copy”.
What are the conditions for paying the construction bill?
Construction payment terms typically specify how long the customer owns until the cash payment is due. These may also offer discounts to help incentivize early payment. This is something we’ll talk about below.
Contractors express some of the most common payment terms in the “Net D” format. This abbreviation shows how many days the customer has until the payment is due. For example, “Net 30” indicates that the full amount (less any retention) is due 30 days after the invoice date. Contractors can also show the discount available by just adding a few numbers. The bill with “2.5/10 Net 30” offers a discount of 2.5% on the total if paid within 10 days.
Payment terms can also specify how the customer pays the amount and the penalties for late payment. For example, the contractor must specify any payment methods required, such as a certified check. In addition, interest may accrue on overdue accounts. However, while late payment terms may be a useful reminder for billers, they must also be agreed upon in the contract beforehand.
Why billing matters in a timely manner
Depending on the accounting method you use as a contractor, billing has a direct impact on your books. After the invoice is issued, many contractors can now record the invoice amount on their balance sheet as an account receivable. The amount may not be cash in your account yet — and you may or may not be able to record it as income — but you can count on it in your financial statements as your company’s equity, also called an asset.
For contractors, billing also has a knock-on effect. Since the project raises costs for progress that has not been invoiced, the job is said to be “low cost”. This means that the contractor is now financing the job from his own bank account. But this does not necessarily mean that, by delaying the issuance of bills, they will avoid paying income taxes. Jobs that don’t need to be done often result in an accounting adjustment to make up for what appears to be a loss in a job that will end up being profitable. So these corporations will still pay taxes on artificially inflated income – income they have earned but still have a long way to go to collect.
But by recording this in your accounting as accounts receivable, it helps keep track of what you owe and when you can collect it. Specifically, you can use your accounting software to monitor your accounts receivable and see how much you owe at one time. And the standard aging report will help you keep track of when the amounts you owe are due for collection – so you can stay proactive.
In short, the better your invoicing processes, the faster you can get paid, and the easier it will be to make sure you get paid.
Invoicing tips to speed up the payment process
1. Know the difference between the receivable and the receivable.
Long billing and payment cycles are a norm in the construction industry. It is common for amounts to be due no later than a month later. But this does not mean that you cannot expect this money earlier. After all, you’re billing yourself for it because you earned it. So it is entirely reasonable to see if you can collect the money sooner or later.
It means that entitlement means entitlement. Net 30 does not mean that the customer has 30 days to ignore the invoice until they see it. This means that he is overdue at 31 days. When that date comes, you should fully expect the money to be in your account and be right to go after it.
2. Use discounts as incentives.
They say that changing behavior sometimes requires carrots and sticks. Deductions for paying the amount billed early are the ‘carrot’. Of course, it may seem bad to willingly give up any percentage of your income. Especially when the profit margins in construction are so thin!
But successful contractors who offer discounts in their payment terms have learned that doing so can help make sure they don’t collect fewer bills altogether—which, once given up and marked on the books as “bad debt,” is essentially a 100% discount. 100%. Offering a small discount for early payment can also be useful to avoid the expense and time wasted pursuing accounts that are several months overdue. I have heard that a bird in the hand is worth two in the bush. Well, a check in hand equals a slightly larger “in the mail” check.
3. Discourage late payment.
Then there is the “stick”. But if you have to apply pressure once the bills are overdue, you’re already behind the ball. Alternatively, contractors may be proactive by writing late payment penalties into their contracts. These can include a percentage of interest accrued for overdue amounts. It may also limit your right to recover costs you incur to collect overdue amounts.
4. Use tools to keep track of your dues.
It’s hard to keep track of who owes you what and when using spreadsheets. With paper bills, it’s almost impossible. But when contractors can run aging reports directly from job cost accounting software, they can be confident that it’s always up-to-date with the latest invoices and cash receipts. Aging reports allow you to view invoice amounts by job and customer that are due:
in 0-30 days
in 31-60 days
in 61-90 days
at 91+ days
After project completion (“keep”)
Looking at each of these windows at the right time can help you anticipate what’s to come and where your cash flow may be constrained by uncollected receivables. And having one central place to look will give your construction company a single source of truth. This keeps everyone on the same page about where projects are and which clients have already been invoiced.
5. Have proactive processes.
A common fatal flaw of a contractor’s cash flow is that no one is responsible for acting proactively in collections. In fact, there is often no process applied at all. Project managers may assume that accounting will follow. Accounting may assume the responsibility of the prime minister. Meanwhile, the unpaid bill remains on the client’s desk because no one has spoken to him in two months.
Every construction company can decide what makes the most sense for their operations, but the best is often the simplest. For example, how many days until customers receive a 30-second courtesy call? How many days until the customer receives a formal email or letter? How long until additional follow-up? Oftentimes, clients just need a gentle reminder. Once they get an alert, they’ll have no problem sending a check — all they need to do is know someone lost it.
Finally, whatever job you follow up with clients will need to know it’s their job. Project managers can have built-in incentives to get timely collections for their projects and avoid low billing. Friendly competition among operations personnel can also help increase group turnover. Of course, for some companies, project managers may be burdened with responsibilities; They will need to appoint someone else to take ownership. They must realize how important they are to the success of the company.
When should contractors issue an invoice?
Realistically, building contractors should try to send their invoices as quickly as possible. Of course, it takes time to process. However, a week’s delay in issuing invoices does not necessarily translate into just a week’s delay in getting payments. The more time passes, the greater the backlog and the easier it becomes for both contractor and client to lose track of what is due and whether or not it was ordered. The surest way to get late payments is bill late and conversely timely bills are more likely to get timely payment.
Fortunately, the most effective invoicing for contractors is always within reach. And that puts something else on hand as well: the cash you’ve earned.