While payment delays are common in the construction industry, there are many tools and methods subcontractors and other construction participants can employ to facilitate a smooth payment process and reduce Days Sales Outstanding (DSO). Staying organized and taking proactive actions will help your business get paid quickly and successfully.
Here’s how subcontractors can speed up the payment process and reduce DSO by promoting visibility and increasing communication on construction projects.
Send notice to promote visibility
Lack of visibility is a systemic problem on construction projects. On large projects with multiple tiers of hiring, top-of-chain parties — like property owners, lenders and general contractors — rarely have contact with sub-tier parties. One problem is that payment often must trickle down from the property owner through several parties to get to subcontractors and suppliers. Another problem is that top-of-chain parties don’t know who these sub-tier parties are. How can a property owner ensure that a sub-subcontractor gets paid if the owner doesn’t know they are on the project?
Sending preliminary notice — sometimes called Notice to Owner or pre-lien notice — solves these problems by notifying top-of-chain parties of your involvement on a project. This simple act of communication prioritizes your invoice, and zlien research has shown that it significantly reduces DSO of construction invoices.
In addition to promoting visibility on construction projects, sending preliminary notice is often required to secure lien rights. So why not send one?
Send a conditional lien waiver with every invoice
Subcontractors frequently sign lien waivers to waive lien rights in exchange for payment. Waivers are commonly exchanged between parties on construction projects, but many people don’t know that there are several types of waiver that work differently.
What Do You Need to Know About Construction Lien Waivers?
Conditional lien waivers are the safest option for subcontractors to sign before getting paid, because they are conditioned upon receipt of payment. This means that a signed conditional waiver doesn’t actually go into effect until payment is received, protecting a subcontractor's right to file a mechanics lien until that right is no longer necessary.
Proactively signing a conditional lien waiver and sending it along with an invoice speeds up the payment process in two ways. First, it prioritizes your invoice. The party making payment will be more likely to hand over payment when they know they are protected from a mechanics lien.
Second, it eliminates the time consuming back and forth that can occur when the paying party must send a blank lien waiver and wait for the signed copy to be returned before making payment. Creating and signing the right kind of lien waiver is easy and free with the Waiver Exchange.
Invoice early and follow up
Sending invoices promptly and following up with reminders when deadlines approach or are missed are good ways to avoid long delays in the payment process. On big projects with many construction companies providing services, sending reminders keeps your invoice top-of-mind.
Another tip is to send invoices and follow-ups via email. This cuts out postage fees and the typical three to five business days it takes for mail to be delivered and keeps communications tidier.
For a more formal approach, consider sending preliminary notices or notices of intent to encourage the party making payment to pay quickly.
Article contributed by Olivia Huppman, zlien Marketing Associate.
