Dispatch #70 - Bill What You Work & Collect What You Bill
In the prior installments of this multi-part “How to Get Paid Faster” series, I covered how to measure A/R and the first three parts of the pay cycle:
Sell work that pays quickly
Set up the job right, and
Deliver the work that you sell.
Let’s turn to the next two phases of the payment cycle:
Bill what you work, and
Collect what you bill.
Once you’ve done the work, you need to bill it in order to get paid:
But wait! Why not bill the work before you do it? That’s not always possible (or even legal, such as in certain California residential work), but it’s not uncommon for commercial contractors to collect up-front deposits before making large job-specific materials and equipment purchases.
Another way to pre-bill is to maintain an overbilled position on your Work in Progress (WIP) schedule. A guideline target for self-performing specialty trade contractors: 4-8% net overbilled on jobs.
Once you’ve done the work, bill customers on time, frequently, accurately, and per the customer’s specifications. Most of the commercial contractors I work with close A/R (i.e. billings are 100% complete) no more than 3 days after month-end. Don’t forget change order work and service tickets, too (invoice the latter daily or weekly at the latest).
Minimize the final progress payment; leave less money on the table that’s subject to the customer’s final acceptance of deliverables.
Finally, as you pull off the job, protect your lien rights by complying with filing deadlines; maintain that leverage.
So you’ve sold the work, done the work, and billed the work. Now it’s time to get paid: collect what you bill.
Collect 100% of what you bill: don’t offer (and don’t agree to) early payment discounts because they are an expensive way to finance your business (typically 12%-24% APR).
Follow up on A/R collections. Confirm receipt of large invoices and those sent to new customers, then follow up immediately and regularly on past due invoices. Be specific. Hearing, “We received your invoice” is good. Hearing, “We received your invoice, it’s been approved for payment and the funds will be in your account by the 17th of this month” is better.
Suggest, negotiate, sweet-talk, cajole, and otherwise do what you can to get your customer to release retentions billed. Even partial release of retentions a few weeks early can make a big difference. Sometimes, reasonableness does prevail.
Provide payment alternatives. Offer convenient payment options such as ACH, wire transfer, or credit cards (if your profit model can accommodate the merchant card fees), and even “we’ll be happy to come right over and pick up the check.”
Coach office and field staff -- particularly on service type work -- to encourage (or require) customers to pay for work the same day it’s performed.
Escalate at-risk customer payments. If accounting fails to collect payment, they notify the project manager (PM). If the PM is unsuccessful, the company’s owners can step in and decide if it’s time to file a lien. As an expensive last resort, the owner may file a lawsuit or place the invoice with a collection agency.
Best practice billing and collections require a little more time upfront but save time and accelerate cash flow down the road. They’re worth the attention.
Need help with this or other financial matters faced by construction contractors? Let’s talk!
David Stern CFO makes every effort to provide useful and accurate information. This content, however, is not intended as a substitute for specific business-related financial advice. We disclaim all warranties and liabilities from its use.