While most industries work on a net-30 payment schedule, payments rarely come that quickly in construction. According to advisory company PwC, the average days sales outstanding (DSO) is about 90 days. To get paid what you’re owed in construction, it takes about twice as long as in other industries.
Slow pays, late pays, and disputes are constant headaches. In 2024, it’s estimated that slow payments produced a financial impact totaling $280 billion in the U.S. alone.
Delayed payments in construction can cause cascading problems, including:
- Negatively impacting cash flow, adding up to 14% of total construction costs
- Delaying projects timelines and completion
- Straining vendor and client relationships
- Missing opportunities to take on additional projects
- Damaging company reputations
Common Causes of Payment Delays
Why are delayed payments in construction so common? There are several unique challenges that many industries don’t have to worry about. For example, construction often deals with complex payment chains involving multiple stakeholders. A single project can include property owners, suppliers, contractors, subcontractors, project managers, and more. This can create multiple points where delays can occur—adding to processing and payment time.
Documentation and Billing Errors
Documentation and billing errors frequently trigger payment delays. Missing lien waivers, incomplete change orders, or incorrect invoicing can halt the project until they are resolved. These issues are compounded when multiple parties are involved, each with their own documentation requirements and approval process.
Contract Disputes
Contract disputes and change orders represent another major headache. When scope changes occur without proper documentation or when contract terms are unclear, disagreements can arise about payment amounts or timing. These disputes often lead to prolonged negotiations and delayed payments. There may also be disagreements about contract performance or quality concerns, which push payments further out.
Inadequate Project Management
Poor project management and communication can create construction debt collection concerns. When project milestones aren't clearly tracked or when communication breaks down between parties, it can lead to misunderstandings about payment timing and requirements.
Poor Due Diligence
One often overlooked cause is inadequate financial due diligence. Many construction companies fail to properly evaluate the financial health of clients or contractors before beginning work. This oversight can lead to partnerships with others that have cash flow problems or poor payment histories.
Implementing Effective Preventive Measures
When one party experiences payment delays, it can affect their ability to pay others, rippling late payments throughout the project ecosystem. This is particularly challenging for smaller contractors and subcontractors who may have limited financial reserves.
To avoid payment delays, construction companies must adopt proactive strategies starting before project initiation.
Business Credit Checks
Thorough pre-project due diligence is essential, including comprehensive evaluation of potential clients' and contractors' financial health. This means reviewing business credit reports and credit histories, payment track records, and current financial stability.
Clear Terms and Payment Schedules
Contracts should include clear payment terms and schedules. Specify payment milestones, required documentation, and processing timeframes. Include provisions for handling change orders and dispute resolution procedures.
Well-defined contracts prevent misunderstandings and provide legal protection if issues arise.
Consistent Documentation and Communication
Establish standard documentation practices across your organization. This includes consistent processes for change orders, progress reports, and lien waivers.
Regular communication protocols should be established at project outset. Schedule routine payment status updates and create clear escalation paths for payment issues. Opening lines of communication helps identify and resolve problems before they cause significant delays.
Schedule Progress Payments
Progress payment scheduling can help you maintain a steady cash flow. Break payments into smaller, more frequent installments tied to specific milestones rather than wait for large lump sums at project completion.
Proactive Account Monitoring
Proactive account monitoring is crucial for identifying warning signs of potential payment issues. Watch for these red flags:
- Changes in business credit scores
- Delayed responses to payment inquiries
- Unusual requests for payment term modifications
- Partial payments without explanation
- Sudden changes in communication patterns
- Missed project milestones
- Reports of payment issues from other contractors
- Changes in key project personnel
- Unusual delays in document processing
Construction Debt Collections and Timely Payments
You deserve to be paid for the work you do and so do your suppliers, contractors, and subs. While payment delays in construction may be common, they are not inevitable.
By implementing thorough financial vetting processes, maintaining clear documentation, and establishing strong communication protocols, companies can significantly reduce their exposure to payment delays.
The key is taking a proactive approach—addressing potential issues before they become problems. Start by reviewing your current payment management practices and identifying areas where these preventive measures can be implemented or strengthened.
Contact Command Credit. Let’s work together to protect your financial stability, mitigate your risks, and avoid delayed payments in construction.