The construction industry has a persistent problem: getting subcontractors paid on time. In fact, we know that only 5% of subcontractors report always getting paid on time, with most waiting an average of 90 days to receive payment. For any business owner, it’s a long time to wait for money owed. For subcontractors, these prolonged payments can prevent them from purchasing necessary materials, paying their workers, or taking on new projects, ultimately putting their business at risk.
Manual, paper-driven systems only exacerbate this challenge. These methods often introduce costly errors and make it difficult to know where payments stand. Without better systems for identifying outstanding invoices, they become increasingly difficult to collect, which can have a huge impact on profitability.
The Hidden Cost of Passive Collections
When it comes to collecting payments in construction, time is quite literally money. The value of a dollar is constantly eroding, impacted by broader economic forces like inflation (which affects all businesses) and interest rates (which affects credit-dependent industries like construction). In fact, research shows that once an invoice hits 90 days past due, it’s worth only 70 cents on the dollar.
What’s more, the US Census Bureau estimates that 26% of invoices over three months old (once again, the average time-to-payment in construction) are uncollectible, increasing to 70% after six months and 90% after a year. This could (in part) explain why businesses write off around 4% of their account receivables (A/R) annually as bad debt. For a company with $10M in sales, this translates to $400,000 in lost revenue.
Bottom line: the longer past-due payments dwindle, the more it costs businesses. Fortunately, there are ways to counteract this.
The Keys to a Proactive Collections Process
By adopting a proactive, collaborative approach to collections, subcontractors can gain greater financial control. Here’s where to start.
1. Effectively review and negotiate contracts.
Contracts set the tone for how and when subcontractors get paid. Before breaking ground, it’s imperative that project stakeholders—back-office personnel most definitely included—review the contract thoroughly. For longer projects, we recommend teams refer back to their contracts every six months or so.
Drawing from our extensive contract risk blog post, these are the four payment-related areas that demand careful attention from subcontractors:
- Payment terms: Does the contract include "pay-if-paid" or "pay-when-paid" clauses? Though neither is ideal, subcontractors should always push to replace the inherently riskier "pay-if-paid" language with “pay-when-paid.”
- Payment application requirements: Understand all the specifics—from required forms and notarization to submission deadlines and methods. Using the wrong form or failing to get a required signature can hold up payment for months.
- Lien waiver details: To secure payments, subcontractors must familiarize themselves with both the project’s and state’s lien waiver requirements. Check out our article covering the main types and timing of lien waivers for even more compliance support.
- Retainage terms: Clarify retention percentages, release conditions, and any variable rate structures.
If any payment terms seem unclear or unreasonable, speak up early. It's much easier to negotiate favorable terms before you sign than to fight payment battles later. Come to the GC with specific solutions—they're often open to changes that work for both parties.
2. Perfect the pay app process.
Reviewing the contract also helps structure an effective pay application process. It ensures subcontractors:
- Use the correct forms required by the GC—and fill out every field completely and accurately.
- Include all supporting documentation that tracks progress and justifies their costs (e.g., schedule of values, change orders, backup materials, daily reports).
- Submit on time and to the right portal, which is trickier than most realize when managing multiple deadlines each month.
Pay apps are a notoriously manual and error-prone process. Digital solutions like Siteline transform pay app submissions from a time-consuming task to a streamlined workflow by automating critical steps and ensuring each pay app meets the GC’s exact specifications. Plus, it centralizes invoice, change order, and lien waiver tracking to help protect subcontractors from potential billing disputes.
3. Stay on top of changes.
When project requirements expand beyond the original agreement (as they often do), always formalize those changes through a written change order. Many subcontractors find themselves performing additional work without proper documentation, which can lead to disputes when they submit an invoice for more than the initial estimate.
Remember: every undocumented task represents a potential financial vulnerability. So, subcontractors should take the time to record extra work requests (or better yet, use Siteline). A quick change order ensures fair and timely compensation for all labor performed.
For more change order management tips, check out this blog post.
4. Closely monitor A/R aging.
Just like most people check the oil in their cars to prevent engine damage, subcontractors must regularly review their accounts receivable (A/R) data to prevent financial breakdowns. The metric that will be most helpful in identifying overdue invoices and recurring late payment patterns is days sales outstanding (DSO)—the number of days between submitting an application for payment and receiving that payment.
As we discussed in this blog post, monitoring DSO helps subcontractors spot payment trends across projects and clients. Knowing this is helpful for:
- Seeing which GCs pay them the fastest—and which pay them the slowest;
- Making strategic bids for projects that will yield the fastest payments;
- Developing a targeted approach to securing past-due payments—what we call an A/R escalation plan.
5. Establish an A/R escalation process.
During our webinar on collections best practices, we asked our audience whether they currently have an A/R escalation plan in place. Here were the results:
- 44% of respondents said they do not have an A/R escalation plan
- 26% of respondents said they do have an A/R escalation process, but they don’t stick with it
- 24% of respondents said they do have an A/R escalation process, and they consistently follow it
It wasn’t altogether surprising to see since managing this process via spreadsheets, disconnected systems, and one-off communications is incredibly difficult. However, developing a realistic and clear A/R escalation plan is probably one of the most important components of any subcontractor’s collections efforts. It guides subcontractors through the steps required to ensure money moves in (and out) as efficiently as possible.
The most effective A/R escalation plans share these hallmarks:
- Immediate response to past-due payments: Remember, the longer late payments linger, the harder they are to collect. As soon as a payment becomes past-due, subcontractors should take swift action. They should arm themselves with essential details—invoice number, the amount due, and the original payment date—to remove any potential confusion during initial follow-up.
- A clear follow-up frequency: When initial payment requests fail, consistent follow-ups become key to holding clients accountable and securing past-due invoices. Subcontractors should determine a follow-up frequency, choose their communication mode (i.e., email or phone), and decide when to bring in senior leadership for additional leverage.
- Defined roles and responsibilities: Every step of an escalation process should have a designated owner. Roles will vary from company to company, but clearly defining who owns what stage of the process will reinforce accountability and make it more difficult for past-due invoices to slip through the cracks. (In this blog post, we offer suggestions on how roles are typically delineated, along with real-world A/R escalation examples.)
- Team alignment: Once these details are ironed out, it’s important for leaders to communicate the process to all team members involved. By ensuring everyone understands their specific roles and how their actions contribute to the overall collections effort, teams will be effective in securing past-due payments.
6. Know when to exercise lien rights.
Despite best efforts, subcontractors may occasionally face payment challenges that require exercising lien rights. While filing a lien is a last resort, it remains a powerful tool in a subcontractor’s arsenal. And oftentimes, issuing a preliminary notice at the start of a project is enough to ensure timely payment—without having to resort to legal action.
Before taking lien action, it’s important for subcontractors to know the specifics of filing a lien for a project and the state in which they’re working. All of this can be found in our guide to mechanic’s liens.
7. Leverage purpose-built technology.
As I hit on at the start, construction is moving faster than ever, and manual, paper-based billing methods just can’t keep up. And without knowing where their money stands or who’s responsible for following up, subcontractors waste so much time chasing down payments.
Siteline is designed to help subcontractors understand the actual status of the dollars coming into their companies, know when it’s time to take action, and ultimately reduce their A/R aging. This is because Siteline:
- Centralizes billing and provides a comprehensive view of every pay app across all clients (filterable by status, project manager, division, and more)
- Automates payment reminder emails to clients as soon as pay apps become past-due
- Enables subcontractor billing teams to create specific tasks that structure their collections strategy—like a built-in A/R escalation plan
- Generates detailed reports that provide an overview of their projects’ billing health from every angle, helping them make smarter business decisions
When put together, these steps can help subcontractors turn a notoriously stressful process into a strategic advantage that fuels their company’s growth. Siteline makes this even more manageable, automating key workflows, providing shared visibility into payment statuses, and helping teams structure their collections efforts for optimal cash flow. Schedule a demo to see how Siteline can help you take control of your financial future.
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