In the construction industry, accounts receivable (AR) management is not just an accounting function — it’s a lifeline for cash flow and business survival. But with payment delays worsening, many construction business owners are facing mounting challenges to keep operations running smoothly. This year alone, payment delays have driven up costs by an estimated $280 billion, according to Rabbet’s 2024 Construction Payments Report. This is forcing some companies to tap into personal savings, credit cards, or even retirement funds just to stay afloat.

The report paints a clear picture: 82 percent of contractors now face payment waits of over 30 days, up from 49 percent two years ago. These delays interrupt cash flow, impacting the ability to secure materials, pay suppliers, and maintain labor schedules, which ultimately slows down projects. Subcontractors, too, are feeling the impact — 100 percent of surveyed subcontractors now consider a general contractor’s payment reputation when bidding, with three out of four raising bids to account for potential delays.

With cash flow interrupted, construction companies face rising interest costs, increased administrative burdens, and the potential for higher subcontractor rates on future projects. For general contractors, these compounded costs ripple through every aspect of business, affecting both current projects and the competitive pricing of future bids.

The True Cost of Delayed Payments

In construction, payment delays carry hidden costs that can strain a contractor’s finances. Known as “carrying costs,” these expenses accumulate through inflation, interest, and lost growth opportunities, all of which affect profitability.

  • Loss in Purchasing Power: Inflation steadily reduces the value of delayed payments, especially as material and labor costs continue to rise. Each month a payment is delayed, its actual buying power decreases, putting added pressure on profitability.
  • Interest Expenses: While waiting for payments, contractors often rely on loans or credit, incurring interest that cuts into profit. If savings are used instead, there’s still an “opportunity cost” since that money could be invested in new projects or equipment that generate revenue.
  • Missed Growth Opportunities: Consistently slow payments can hold a company back from taking on new projects. Contractors waiting 60 or 90 days to get paid may have to turn down new business, limiting their growth over time.

Developing a Resilient AR Strategy

An effective accounts receivable strategy can be a powerful asset in mitigating cash flow challenges. To improve payment reliability and protect cash flow, construction companies can implement these strategies:

  • Perform Client Credit Checks: Before starting new projects, conduct credit checks to assess a client’s payment history and financial stability. This can help avoid unreliable clients and maintain a more predictable cash flow.
  • Set Clear Payment Terms: Establish upfront payment schedules, due dates, and expectations within each contract. Adding clauses for interest on late payments or incentives for early payments encourages clients to adhere to timelines.
  • Implement Progress Billing: Invoicing clients at specific project milestones rather than waiting until completion brings in funds consistently, keeping cash flow steady throughout long-term projects.
  • Offer Flexible Payment Options: Providing multiple payment methods, such as ACH transfers, credit cards, or online payment portals, makes it more convenient for clients to pay, which can reduce delays.
  • Leverage Technology: Automated invoicing software can track payments, send reminders, and offer digital payment options. Some systems now include AI capabilities that analyze client payment patterns and predict potential late payments, allowing businesses to address issues before they impact cash flow. Additionally, monitoring key metrics like Days Sales Outstanding (DSO) and Accounts Receivable Turnover (ART) helps companies understand cash flow trends and take proactive action.
  • Improve Client Communication: With processes moving online, clear communication is crucial. Electronic invoicing ensures prompt delivery, and regular follow-ups, especially for delayed collections, help confirm that payments weren’t missed. Proactive communication also strengthens client trust and reduces future payment issues.
  • Establish a Consistent Collections Policy: Create a structured collections policy that defines the timeline for reminders, follow-ups, and escalation. This ensures timely action on overdue accounts and reduces the risk of bad debts.
  • Track Payment Patterns: Monitor each client’s payment behavior to identify consistent late payers. For these clients, consider adjusting terms, such as requiring larger upfront deposits or stricter follow-up efforts to improve collections.
  • Train Staff on AR Best Practices: A well-trained team familiar with AR tools and procedures can improve communication with clients and streamline the collections process, ensuring that payments are managed effectively and efficiently.

Taking Action

With payment delays on the rise, construction businesses face unique pressures that can disrupt daily operations and impact long-term profitability. A proactive, well-structured AR strategy helps mitigate these risks. To learn more, contact Jennifer French, Partner on PBMares’ Construction & Real Estate team.