Managing collections has always been difficult for finance executives in the construction industry. Problems often stem from the fact that many commercial clients have poor payment records. However, the greater problem is that most midsized construction companies do not have a well-organized system for collecting invoices. Instead, they make collection calls when they have the time or when they need money. This approach results in cash flow problems that could easily be prevented.

Following are six steps to improving collections and ensuring invoices get paid on time. This system is relatively simple and, once implemented, requires minimal maintenance.

Step 1: Understand the Contract

Most construction contracts spell out how and when invoices will be paid, but executives at small construction firms often gloss over those detailed payment terms. Doing so becomes problematic when it’s time to collect and the contractor discovers the contract terms differ from its expectations. Be sure to read and understand the payment section of the contract before starting the project. If the payment terms are too burdensome, negotiate better terms before signing.

Step 2: Work With Creditworthy Commercial Clients
Most contracts have common net payment terms that allow the client to pay invoices in 30 to 60 days. Assuming the company can afford to wait, this delay should not pose a problem. However, offer terms only to clients with good commercial credit; otherwise, there is a risk of serious collection problems. (Click here for an article on evaluating a commercial client’s creditworthiness.)

Step 3: Use a Letter of Acceptance
Most construction projects use punch lists or a similar document to outline completed work. However, few companies add legal protections to the punch list. Use a letter of acceptance that explains the completed work and has legal language stating the work has been reviewed and approved by the client. After review, ask the client’s onsite manager or representative to sign the letter of acceptance. Keep in mind that if the legal language is too stringent, the onsite manager may simply refuse to sign. Work with an attorney to develop terms that are fair and easy to understand. This letter can be useful if collections problems arise.

Step 4: Follow the Payment Procedure
Failing to follow the payment procedure stipulated in the contract accounts for the majority of payment disputes in the construction industry. Read the contract and follow the procedure precisely. If the contract requires an invoice and signed punch list to be sent to the onsite manager, with copies sent to the accounts receivable department and the supervisor, then do so. Otherwise, the client is likely to pay late. Also, add a copy of the signed letter of acceptance.

Step 5: Use the Invoice Aging Report Regularly
Once the invoice has been submitted according to the terms of the contract, it’s a matter of waiting for the payment. The invoice aging report included in most business accounting software can be used to verify which invoices are past due and for how long. Run this report regularly. If an invoice is past due by more than five days, call the client to inquire about the payment. Many payment problems can be solved with a simple call to remind the client that it’s time to pay.

Step 6: Deal With Quality and Financial Issues
While the previous steps minimize the chances something will go wrong, payment problems can still happen from time to time. The most common problems are related to quality. Often, the client complains the work was done improperly and threatens to withhold payment until it’s completed. The problem is that some clients use this strategy to get additional “out-of-scope” work done—often without compensation. If there is a problem with the work, fix it as quickly and efficiently as possible. This response helps maintain a solid industry reputation. However, if the work is up to quality standards, direct the client to the signed letter of acceptance. More often than not, this approach resolves the issue. If it doesn’t, consider working with an attorney.

Another common problem is that the client may have financial difficulties and be unable to pay. Using commercial credit reports minimizes this possibility, but it can happen. It’s best to work out a payment plan with the client. However, if the client is unwilling to negotiate, enlist a lawyer or collections specialist.

Remember to remain polite and professional in all client communications. Experience shows that collections chances improve if the other party is treated with respect and fairness.

Marco Terry is managing director of Commercial Capital LLC. For information, call (877) 300 3258 or visit