A recent study of construction companies unveiled a common theme. 100% reported late payments from clients.
Wow.
It takes longer to get paid in the construction industry than just about any other business. On average, it takes about 83 days for cash to roll in after you send an invoice. That can put a crimp in your cash flow and crush your working capital.
While you can plan a bit knowing that payments are likely to be delayed, high-risk accounts can cause you to lose sleep.
High-Risk Accounts Receivable in the Construction Industry
When an account falls into the high-risk category, you need to take extra precautions to protect yourself. This starts by doing your due diligence before you start with a new client. You need to know what you’re getting into and the likelihood you’ll get paid for the work you do. Even with progress payments, late pays, cash retentions, and defaults can cause significant problems.
Before extending credit, you need to evaluate your client’s financial health.
Assessing Financial Stability
Your first step is pulling a business credit report. These reports can show you a client’s payment history, provide scores indicating the likelihood of on-time payments or defaults, and help you understand their financial health.
For potential high-risk accounts, you may also want to review financial statements and conduct background investigations to look for red flags.
Common warning signs include:
- Late or missed payments
- High levels of debt compared to assets
- Legal action, liens, or judgments
- Bankruptcies
Setting Credit Limits
When you suspect high risk, it’s a good idea to limit exposure by establishing clear credit terms based on your risk assessment. Rather than use a one-size-fits-all agreement, you need to adjust your credit policies to adapt to the risk level. This might require more milestone payments, higher interest rates for late payments, and incentives for timely payments.
Legal Review
For high-risk construction accounts receivables, consult with your attorney to ensure contracts are drafted to protect your company and provide mechanisms for relief in case of late payments or defaults.
Ongoing Monitoring
A lot can happen between the time you sign a contract and complete the work. Regular monitoring of a client’s financial health can flag any downturns to help protect you.
Regular Communication
Make sure you stay in touch with high-risk clients and don’t let things lapse. If you see warning signs or have concerns, address them early and work together to find solutions. It’s smart to do this at regular intervals. For example, you may want to lock in monthly check-ins to ensure things are progressing properly, or at key points in a contract—such as before you invest in materials or engage subcontractors.
Construction Accounts Receivable—Risk Mitigation Strategies
Especially for high-risk accounts receivable in the construction industry, you need to make sure your finance team is on top of things. Best practices include:
- Sending invoices promptly: Delays in invoicing result in payment delays. Clearly outline payment terms in each invoice.
- Following up on overdue payments: Maintain a structured follow-up process through emails, phone calls, and demand letters.
- Utilizing aging reports: Regularly review accounts receivable aging reports to identify at-risk accounts and take early action.
Many companies choose to protect their construction accounts receivables by employing alternative strategies, including:
- Payment bonds and lien rights: Securing payments through legal measures that protect contractors from non-payment.
- Trade credit insurance: Insuring receivables to reduce financial exposure from high-risk clients.
- Factoring services: Selling outstanding invoices to factoring companies for immediate cash flow, reducing the burden of collections.
There’s a cost to each of these, so you will need to factor ROI into your analysis to determine whether such strategies make sense for your company.
Mitigating Your Risk for Construction Account Receivables
Command Credit can help you mitigate risk with on-demand business credit reports from Experian, Equifax, D&B, and Credit Reports World. Comprehensive business credit reports show how clients pay their vendors, validate corporate registration, and uncover any public filing that might impact your construction accounts receivables. We also provide:
- Portfolio scoring and analysis: Evaluate your entire credit portfolio to determine a baseline for risk tolerance and analyze the impact of taking on additional risk.
- Account monitoring: Continuous monitoring of your active accounts with automated alerts for material changes in your client’s financial health.
With Command Credit, you get real-time access to the most reliable data without having to sign up for a long-term subscription. You pay for only the services you need when you need them. This can help you sleep better, knowing that you’re mitigating risks and protecting your cash flow.
Contact Command Credit today to discuss more strategies for high-risk accounts receivable in the construction industry.