Construction billing can be a major source of inefficiency and conflict, leading to project delays. In this article, we’ll uncover the common challenges that construction companies face with their payment application processes—from inaccurate records to payment holdups. We’ll also provide strategies for achieving smoother financial operations by implementing best practices and leveraging technology solutions.
Read on to learn how to overcome these issues to prevent delayed payments from impacting your project schedule.
Understanding construction billing
Construction billing is the process contractors, subcontractors, suppliers or any other entity engaged in a construction project follow to invoice for the services or materials they have supplied. The construction industry is complex, and construction billing must be accurate because contracts are complicated.
They include overhead expenses like labor, insurance, materials and mobilization. Flexible deadlines and unpredictable events, such as weather or regulatory delays, can impact project timelines.
Construction billing codes create a system to categorize construction billing items. This makes it easier to group similar items and reference them later. RedTeam Flex allows construction managers to keep track of them from the bidding process onwards. If you elect to link your schedule of values to your budget, you can use the same set of budget codes as the basis for your construction billing with progress billing forms, including cost-plus billing options with supporting cost backup documentation.
Common construction billing problems
Construction billing can be complex because of the various factors and vendors involved in construction projects. Consequently, numerous potential problems may arise. These are some of the most common construction billing issues:
1. Incomplete or inaccurate records
Accurate documentation will validate billing claims and ensure smooth transactions like disputes over the scope of work. Contracts should have clear terms that are communicated to all parties involved. For instance, vague terms can spark confusion over the release of retained funds.
2. Unapproved change orders
Failure to document or obtain proper approval for changes or additions in a project can lead to disputes during the billing process. This can be remedied using comprehensive construction billing software to improve change order management and approval.
3. Holdbacks
In construction projects, it’s common to have a holdback clause. This clause mandates that the client retains a certain percentage of each progress bill until a predetermined project value is reached. This ensures contractors fulfill their responsibilities and address any remedial work on the jobsite and closeout requirements like final drawings or documentation. Being able to leverage construction software with integrated punch lists, enables streamlined approval steps.
4. Fluctuations in material costs
Fluctuations in prices because of a significant time gap between cost estimation and material purchase or scarcity of goods can result in billing discrepancies. To counter these fluctuations, teams should have contingency plans with alternative materials.
5. Using outdated or inefficient billing systems
Manual billing processes and outdated software are prone to errors and inefficiencies. Modern construction billing software equips construction teams with industry-specific tools to manage project costs, approve changes and monitor vendors. Using unit rates for cost-plus or time and material contracts and billing will allow you to adjust more efficiently instead of working with lump-sum or fixed-price contracts.
6. Non-payment and liens
Contractors can take a lien on the property to ensure payment, but prevention is always best. A consistent process to vet a customer before moving forward can reduce this burden.
7. Billing cycle delays
Both general contractors and clients need progress billing to be submitted promptly by a fixed date every month. Missing a due date would mean drastically increasing delays. You can avoid this with an automated construction billing process and change order approval.
The construction billing process
The different types of construction billing methods and software to manage this process can help alleviate potential problems:
Lump-sum or fixed-price contract
All work has a fixed price with this contract type. The project scope is clearly defined, and the contractor commits to delivering the specified work for that agreed-upon price.
- Progress billing: Parties typically adhere to a payment schedule based on the percentage of completion. The owner is billed when specific project milestones are achieved. Progress billing is commonly employed for long-term projects with substantial budgets. To ensure a smooth payment process, it’s imperative to clearly outline the payment schedule in the contract.
Cost-plus contract
The client reimburses the contractor for all legitimate costs incurred during the project (such as labor and materials) and an added amount to account for overhead and profit. The specifics of this additional amount can be determined through a fixed fee, a percentage of the total cost or a combination of both.
Time and materials contracts
The contractor’s payment is determined by the time and materials used for the job. Both labor and material costs are calculated based on an agreed-upon hourly or daily rate. Materials are billed as they are used to ensure accurate payment. There must be a clear scope and oversight for this to be managed appropriately.
Unit pricing contracts
Payment in this context is calculated based on a specific price per unit or item of work. If initial estimates are incorrect, it can lead to significant variations in the total cost. With this method, you can easily adjust quantities per your actual needs without significant contractual changes. It proves particularly advantageous for projects that involve uncertain amounts.
One potential issue is that total cost can vary greatly if initial estimates are incorrect.
Best practices for successful construction billing
Across the US, our clients experience the benefits of leveraging our construction management solutions to manage their construction financials. The following are some best practices for successful construction billing:
Timely invoices
Sending on-time invoicing leads to timely payments. Construction software that integrates billing for invoice management can help with this. RedTeam’s solutions integrate with Intuit QuickBooks, Sage and Acumatica to make managing construction accounting simpler. Additionally, keep line items clear and accurate to avoid confusion.
Track time and materials
Proper time tracking and monitoring of materials ensure construction billing is accurate. Working with construction billing software with these capabilities allows for better transparency and accountability since all parties can access the online data. This way, everyone can be on the same page, and potential issues can be avoided altogether.
Implement shorter billing cycles
Maintaining short and reasonable payment terms in construction billing is highly recommended. Longer payment terms can increase debt ratios. Therefore, consider 30-day payment terms in your construction billing. This payment period is firm and accommodating, ensuring all parties can quickly meet their financial obligations.
Send notifications on invoices
If your payment is overdue, reach out and ask for an update. This demonstrates your professionalism and provides assurance that things are on track. Maintain open communication with your clients and proactively remind them about upcoming payment deadlines or invoice disputes. This approach can significantly contribute to avoiding late payments, ensuring a healthy financial flow and avoiding construction delays.
Choose the right software
You can significantly enhance your construction billing process by selecting the appropriate software for construction billing methods. Seek out construction-specific software for customized functionality and features that align with your specific requirements.
RedTeam offers construction management solutions for commercial GCs that integrate financial and project management from preconstruction through closeout. Learn more!
