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Submitting an invoice for completed work and then getting paid is about as straightforward as the construction business gets. Or at least it should be. Getting paid on time is the lifeblood for contractors, but many consistently make the same mistakes over and over when handling this vital process.
Here are the biggest mistakes many contractors make when it comes to invoice management.
Not knowing what's in the contract
Reading a contract and knowing its terms are the first steps to getting invoices right. The contract contains information on which forms to use, billing and payment timelines and what information must accompany each payment request — this is important to know if you want to be able to pay bills and make payroll.
"As basic as it sounds,” said Carl Oliveri, partner and construction practice leader at New York City accounting and consulting firm Grassi & Co, “that's where it all starts and stops. If you're not billing within the terms of the contract, you're not going to get paid.”
Mostly, the confusion arises in the relationship between subcontractor and general contractor, but GCs need to be aware of the requirements attached to their invoicing procedures with the owner.
General contractors and subs "don't review [the requirements] prior to the contract formation, and then are shocked as to what is in there.”
Co-chair, construction law practice at Giordano Halleran & Ciesla, New York City area
When a project uses construction loans, for instance, there could be specific requirements that flow down from loan terms into the general contract, said attorney Timothy DeHaut, co-chair of the construction law practice at Giordano Halleran & Ciesla in the New York City area. For instance, prior to payment, the GC could be asked to sign away the right to any claims against the project through the date of payment so as to minimize the owner’s and lender’s exposure to change orders or unexpected costs.
This can happen to subcontractors as well, he said, and recommends that all contractors try to negotiate terms of lien waivers or other documents that could cut into their rights to bill for extra work.
General contractors and subs "don't review [the requirements] prior to the contract formation,” DeHaut said, “and then are shocked as to what is in there.”
Not paying attention to clients' billing processes
Some of the problems that subcontractors, particularly smaller ones, have with compliance to the terms of a contract are sometimes due to their limited experience with a wide variety of clients. These companies have spent years doing business with just a few general contractors and just assume other general contractors conduct business the same way.
Oliveri said subs should try to make a concerted effort to get to know the billing process and schedule of each client. There might even be a contract clause that allows billing twice a month instead of just once, which is most common in subcontracts. For cash flow, that could be a game changer.
Sarah Rowe, accounting director for general contractor Gray Construction in Lexington, Kentucky, said the company, which performs work in several states, requires that most subcontractors use Textura, which is a popular payment processing software. Using Textura, she said, has streamlined Gray’s subcontractor pay application process because all of the required documents — including lien waivers — must be uploaded with the electronic pay request. This cuts down on the confusion that accompanies the typical monthly paper swap at billing time and gets Gray’s subcontractors paid about five days earlier.
Even so, some subcontractors will not submit the required documents, and Rowe said she believes that it’s because they’re just not aware of the contract requirements.
Failing to communicate with subs
This lack of communication, Rowe said, usually starts at the beginning of a project between the subcontractor’s project management team and accounting department. Many times, a sub’s accounting team is not involved with contract negotiations and is not made aware of billing procedures until it isn’t paid.
“So once [our accounting department] gets past the [subcontractor’s] project team to the accounting group,” she said, “they know what's required, and then it becomes part of the monthly process, and their payments are not held up.”
“What you really need to do in that instance is create a bridge between project management and accounting,” Oliveri said. “You need to break down the silo between office and field, and the best kind of position [for that] is a project accountant, who is going to be able to work with all the project managers on financial data.”
Submitting invoices late
Another big mistake contractors make when it comes to pay applications is not turning them in at all, although this is a problem that really applies to subcontractors that don’t have the administrative support staff to handle invoicing, Oliveri said.
The individuals who run those companies, he said, don’t look at projects as the profit centers they are but instead see the billing function as a burdensome task. Filling out paperwork takes away from what they’re doing, he said, which is running their jobs. What they don’t understand, however, is that each project has to sustain itself, and the only way it's going to be successful is to get cash into the business.
However, if a subcontractor does neglect to turn in a bill, the general contractor, which must submit a pay requisition to the owner for all work completed, might have it covered and then turn in a bill for the sub’s work so the GC can get paid on schedule.
One reason a general contractor would pay the subcontractor anyway, said Oliveri, is because of the “pay when paid” clauses that are in many subcontracts. This obligates the general contractor to pay a subcontractor if it has received payment from the owner for the subcontractor’s work.
Another reason, he said, is that general contractors don’t want disruptions caused by a cash-poor subcontractor —i.e. material suppliers refusing to deliver because they haven’t been paid or employees not showing up because they haven’t seen a paycheck.
Submitting incorrect invoices
Even when construction firms do submit their billing on time, sometimes the invoices aren't for the right amount.
Subcontractors especially, DeHaut said, may try to front-load a pay application to get a little extra cash flow by stating that they have completed a higher percentage of work than they actually have. “That’s never a good idea,” he said. Sometimes those applications sail through, but if the architect or a bank inspector checks the project paperwork to verify the numbers, it can lead to a loss of the sub's credibility and delays the payment process.
But one area where contractors can often bill legitimately in advance of work performed — but don’t — is when the necessary materials have been delivered to the site or to an approved offsite storage location. That issue, DeHaut said, should be worked out before subcontractors sign their contracts. Depending on the trade, the materials could represent a significant portion of the subcontract amount, and the subcontractors’ suppliers might not wait until after installation to be paid.
Making change order mistakes
And then there are change orders. Mistakes here tend to happen more on subcontractor applications and are often a result of miscommunication in the field.
Contractors might think additional work they have performed is approved, even though they haven’t received a fully executed change order from the customer yet, so they bill for it anyway.
In a system like Textura, Rowe said, unapproved change orders won’t process, so it brings the issue to the forefront right away.
In order to help avoid confusion around change orders, DeHaut said, using the American Institute of Architects’ G702 Application for Payment and the accompanying G703 Continuation Sheet forms help keep paying status and change order information organized.
“It’s an accurate reflection of the work,” he said, “and makes the job [of tracking them] easier. [The forms are] upfront and tend to help avoid disputes at the end.”
Not negotiating retainage
Subcontractors also miss opportunities to apply for a reduction in the amount of retainage that general contractors often hold out of their payments because they don’t realize they can. Typically, 10% of the contract amount is withheld, but that is sometimes reduced to 5% or lower when the project hits a certain percentage of completion milestone.
“I definitely feel like the subcontractor community should become very well educated in that because there are certain states that have very specific retainage rules, and if they're not aware of that, they could be missing out,” Rowe said.
The real lesson here, Oliveri said, is that contractors and subcontractors should be billing as often as they can for as much as they can within the limits of their contracts.
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