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Contractors and sub-contractors have all too often suffered delayed payments from the hands of traditionally-minded project owners demanding over 2-month credit periods across projects big and small.
Severe cash-flow dents is a common reality shared by construction contractors. The U.S. construction industry approximately loses $40 million annually as delayed payments strain vendor relationships that have long hinged on mutual trust, especially so in the matter of getting paid on time.
Delayed construction payments can snowball into sudden project closedowns, as sub-contractors threaten to suspend work if pre-determined payment cycles haven’t been honored. A sentiment well-known in the industry, but sadly dismissed too often by owners who cite being stretched too thin between ensuring project timelines and enforcing quality and safety standards as laid out in contractual documents. This is proving detrimental to contractors who risk bankruptcy when payment terms aren’t followed or are caught for committing errors and omissions whether due to negligence or being under-informed, further risking their reputation in the market.
Contractors may not get paid on time for several reasons that can quickly turn into litigious and highly sensitive lawsuits. However, to address the scope of this post, we reason why construction billing software is vital in meeting contractor payment schedules.
Digitized payments remove lousy barriers in enforcing contract terms
Since construction payments are independent of the project delivery method chosen by owners, construction services are billed in two categories: professional/consulting services and actual construction services. Depending upon project size and scale, various types of these services can be bid out to multiple contractors who then can invoice based on a fixed price (either lump sum or fixed unit pricing), a guaranteed maximum price, or actual costs plus a markup.
Payment terms, therefore, are drafted differently and come with various applications for payments. What’s tedious and inefficient is getting these terms fulfilled through manual payment processing systems involving tonnes of documentation before one invoice gets sent to a project owner. Looking at how procurement and payment processing costs mean rising costs for global business-to-business firms, an automated accounts payable system is highly opportune for companies seeking to capture market edge and win the respect of top-notch contractors. The unanimous vote is yet to tilt toward construction billing software as owners are still to realize procedural inefficiencies of old payment systems and the benefits of payment automation.
Even though technology has disrupted other areas of construction, it’s strikingly distressing to see construction owners lose out on its huge potential.
Construction billing software prevents human error in estimations
Construction accounting software issues invoices based on work completed and accurate estimations of unit-based material cost spent on specific construction activities. Project data being fed at regular intervals as the construction progresses, the invoicing software alerts construction companies to payments due through an automated series of emails sent to owners, giving cost breakdowns and applicable taxes. Since different construction billing software possesses a varying range of capabilities, it’s crucial to choose one that factors in your project’s complexities and seamlessly integrates with your existing construction tech systems.
In doing this, paying contractors accurately and within time is possible and will ensure owners don’t face late payment fines and a prolonged processing cost if relying on manual payment systems. Moreover, they strengthen professional ties with contractors who have unfortunately come to accept late payments as their fate and even improve your accounting department’s visibility into the kind of spends occurring across the project lifecycle.
Construction payment software simplifies construction processes
Traditional payment methods such as pay-when-paid and pay-if-paid clauses have complicated payment schedules, causing irreversible damages to subcontractors’ working capital reserves. Such complicated payment procedures have led to far-extending effects on the lending environment for construction contractors to cover their working capital gaps. This hampers their ability to finance for contingencies and risks mandatory to be assessed until final construction inspection is closed.
With that established, owners need to be more mindful of who they’re working with and specifically include terms that speak to each contractor’s concerns so that they’re able to work more collaboratively by weeding out avoidable financial risks.
Take a scenario where a construction owner employs job order contracting. This is a procurement method that allows owners to obtain multiple bids for various projects within a fiscal cycle. If an owner is planning to erect business knowledge parks for a multinational corporation across states and provinces, they will bid out to local contractors who offer rates that help optimize the project budget. Now if such bidding occurs under the Construction Manager at Risk (CAMR) project delivery method, where the owner assumes considerable responsibility, the contractors they onboard are likely to provide design-assist services—the pre-construction architectural designing of a building or construction project—that won’t make them liable for actual construction activities.
Taken to be the more desirable type of work by contractors, it has its challenges with regard to estimating the effort required to create as-built drawings. How a construction payment software eases such complex project contracting is streamline these bids into different project work categories and help owners and contractors get a clear perspective on what’s included in the estimate and whether it’s fair enough to further assist in getting paid on time.
Construction billing software eliminates “breach of contract” risks
Till the contract is valid, many contractors request interim payments, commonly known as progress payments, by issuing interim certificates. These interim payment terms remind owners what they owe contractors after a pre-determined set of activities have been fully executed to client expectations, to help contractors stabilize their cash flow to fund the rest of the project work. When such interim certificates aren’t issued by owners to cite as proof of payment as stated in the project contract, they risk having breached contractual terms and can be subject to a lawsuit if they aren’t honored as per delayed payment clauses.
A key payment concept that falls in the middle of construction payment schedules is lien waivers. This is a surety given by contractors that they’ve received their payment in exchange for contractor lien rights. Read this post to understand how they’re frequently misunderstood so that these construction documents can be better used as relationship builders between owners, contractors, and sub-contractors.
Honing a leadership and collaborative mindset using construction billing software
Digitizing construction payments is embracing the new reality of accelerated construction growth through cutting-edge technology.
These tools aren’t just operational solutions; they are empowering assets for construction teams as they patch knowledge gaps implanted by siloed paperwork across departments. They help understand varying payment clauses and tricky matters of lien waivers where everyone can confidently handle potential conflicts and reduce legal costs invited by onboarding professional attorneys when they can be effectively dealt with the in-house team. When project managers, construction managers, owners, contractors, and subs work in synergy, there will be lesser confrontations during site walkthroughs and faster clearance of payments will be enabled.
Having a tech-enabled payment system ensures you’re consistently on top of pending activities and manage on-ground teams optimally while assuring the client that the construction work will finish by stated timeframes and under budget. This instills a greater sense of accountability, making everyone a leader and a collaborator in their own right.
Setting payment software in motion isn’t going to be an overnight change across the U.S. construction industry. It will take repeated attempts by productivity conscious advocates of technology to remind the industry of the enormous benefits that befall those willing to change their ways.