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Three methods for reducing late payments to your construction company

The construction industry is notorious for late payment throughout the supply chain, with 42% of construction SMEs stating that the situation hasn’t improved over the past year, and a further 33% saying it’s become worse – according to research from Tungsten. If clients don’t pay you on time, you can’t pay subcontractors or suppliers. This causes the project to grind to a halt and lead to further cash flow problems as deadlines are missed.

Government efforts to reduce the prevalence of late payment include the Prompt Payment Code, a voluntary pledge from companies to pay up on time and refrain from changing previously agreed payment terms. However, the Tungsten research shows that only 22% of construction SMEs have even heard of the Prompt Payment Code – even though it has nearly 2000 signatories.

As a small business, late payments are a huge challenge – you don’t have the legal clout and know-how to be able to stand up to large clients. The following three methods can help you to limit your late payment problems in the future.

#1 Visibility

Many construction SMEs don’t get paid quickly because their invoicing system is unorganised. Improve your system by introducing a methodical approach to invoices and payments, so that it’s immediately clear when invoices should be sent, when payment is due, and the nature of any follow up communication. Implement a system for how you’ll chase payment. For example, a polite email reminding the client that payment is due within 48 hours, perhaps followed by a firmer follow up if they haven’t paid up a week later, then a phone call if it stretches to two weeks. Decide when to get in touch with a debt collection company – the mere threat of having a third party involved may prompt the company to finally pay up. Documenting all these steps is essential if you are to be fully aware of what is owed to you.  Accounting software is a huge help for this task.

#2 Contract clauses

Very occasionally, you may have to take a late-payer to court over their tardiness. While court cases can be an effective means of clawing back the money that is owed to you, they can be expensive and drag on for months or years – a large business may be able to absorb these costs, but it can be crippling for an SME. Ideally, you’ll want to resolve the matter before it reaches the court. Ensure that all your contracts have mediation clauses in them - these obligate parties to attempt to resolve disputes through a third party prior to court action. This isn’t legal advice – speak to a legal professional to ensure that your mediation clause is precise enough for this purpose.

#3 Be efficient and thorough

You can only dictate your side of the payment process, so make sure everything you’re responsible for runs smoothly. Ensure that every invoice is sent out on time and to the current contact. Send follow up emails to new clients to ensure the invoice was received. Triple check the figures on every invoice.

It’s not easy to get big businesses to pay you on time, but by using these three methods you can give your construction company a fighting chance of improving your cash flow.

If you’re in need of new accounting software to help you deal with late payments and other issues, see what features you should be looking out for.