By Claire Wilson, Siteline
As an electrical contractor, your expertise lies in delivering high-quality installations and managing complex projects. But there’s a critical challenge that can make or break even the most skilled contractors: cash flow management. With construction ranking among the slowest-paying industries globally, understanding how to navigate payment landscapes has become as crucial as mastering the technical aspects of the trade.
The Reality of Construction Payment Cycles
Here’s a hard truth: only 5% of contractors always receive payment according to their contract terms. For subcontractors, this means fronting substantial costs for materials, equipment rentals, and skilled labor while waiting the industry average of 90 days to see any revenue from completed work.
This payment gap creates a precarious situation for trade contractors, who represent the second most common type of business to face bankruptcy — surpassed only by restaurants. Contrary to what many might assume, these failures rarely stem from a lack of profitability. Instead, they’re primarily driven by cash flow challenges.
Today’s Complex Payment Landscape
The complexity of the current payment landscape only compounds these challenges. Each general contractor maintains different requirements, and most accounting systems struggle to handle these variations effectively. The result? A maze of manual workflows cobbled together from spreadsheets, emails, PDFs, and phone calls — often existing only in the minds of key accounting personnel. When these team members are unavailable, the entire process can grind to a halt, leaving executives without visibility into their company’s cash position.
Many subcontractors resign themselves to the notion that “we get paid when the GC gets paid.” But this is only true to an extent. There are proven strategies that can help electrical contractors take control of their cash flow and get paid faster.
Cash Flow Secrets for Faster Payments
- Minimize your risk exposure.
Thoroughly review your contract with a forensic eye before signing. Identify potential financial risks by meticulously examining payment terms, change order requirements, and lien waiver clauses that could impact your cash flow and project profitability.
Key areas to scrutinize include payment schedules, contingencies for project delays, and mechanisms for resolving disputes. Look for clauses that could unexpectedly shift financial burden or limit your ability to recover costs. Pay special attention to:
- Pay app form requirements
- Payment timing and milestones
- Change order approval processes
- Conditions for lien waivers
- Retention payment terms
- Potential penalty clauses
Proactively negotiate unfavorable terms. For instance, replace “pay-if-paid” clauses — where the GC doesn’t have to pay you at all if they don’t get paid — with “pay-when-paid” language. Don’t accept restrictive provisions without challenge. When contract terms seem overly limiting, propose alternative language that provides greater financial flexibility and protection for your business.
Pro tip: Request a copy of the general contractor’s contract with the project owner. This document can reveal key payment triggers and incentives that might inform your negotiation strategy.
- Address common payment bottlenecks.
Several issues consistently delay payments in construction. Here’s how to address them:
Proactively Manage Vendor Lien Waivers
Missing lien waivers are the number one reason pay apps are put on hold. Yet, you’d be surprised to learn that many contractors do not have a system for managing waivers — lower tiers and suppliers, especially. To better manage these documents:
- Know the specific lien waiver requirements for each job (another perk of reviewing the contract)
- Know which GCs require lower-tier and/or supplier lien waivers
- Require lower tiers to submit lien waivers with their monthly invoices
- Use software to automate this process
Avoid Pay Application Errors
When it comes to compiling pay apps, there’s a lot that can go awry—incorrect forms, math errors, missing attachments, the list goes on. To ensure your pay app is 100% accurate at the time of submission:
- Review documentation requirements specific to each GC (yet another reason to inspect those contracts)
- Double-check Excel formulas in G702 and G703 forms to prevent math errors
- Implement quality control measures before submission
- Consider specialized software to further streamline the process
Stay on Top of Change Orders
Managing multiple change orders across different projects, each with unique requirements, is no easy feat. To prevent any change orders from slipping through the cracks:
- Understand precisely what documentation and timing are required for change order approvals (have I mentioned how important it is to review the contract?)
- Begin drafting change order proposals immediately upon identifying potential modifications
- Implement a tracking system to monitor the status of all change orders across projects
- Create a centralized repository for all change order documentation and communications
Ensure Consistent Billing
Forgetting to bill or failing to submit by the billing deadline happens more often than you’d think. It’s often the result of overworked teams managing too many projects at once. To prevent these mishaps:
- Create a central tracking system for various GC portal submissions
- Maintain a calendar of billing deadlines
- Assign clear responsibility for the billing process and oversight
- Increase field-to-office collaboration.
Clear communication between project managers and accounting teams is crucial to avoiding financial discrepancies that can negatively impact your business. Streamline field-to-office communication by:
- Establishing an effective chain of communication, complete with defined roles and responsibilities
- Implementing cloud-based software to facilitate real-time information sharing
- Digitizing and consolidating all work-related materials into a centralized location
- Leveraging project managers (PMs) to facilitate payment discussions, track payment milestones, and take action when payments are delayed
- Regularly analyze your A/R data.
Tracking accounts receivable (A/R) data provides critical insights into financial health and strategic decision-making. By monitoring days sales outstanding (DSO) especially — and comparing it to industry benchmarks — subcontractors can:
- Ensure that clients adhere to contractual payment obligations
- Identify payment collection trends and potential cash flow risks
- Establish more accurate revenue and cash flow projections
A/R aging data also lays the groundwork for any A/R escalation plan, which I highly recommend instituting. With a well-defined escalation plan, your team knows exactly how and when to proceed when cash flow issues arise. This helps them focus on effectively resolving the issue to get cash in the door faster.
- Use billing projections to manage backlog.
Creating and reviewing billing projections is essential for identifying potential cash flow issues early on. Anticipating dips in your backlog can ultimately help you:
- Implement cost-saving measures (e.g., expense tracking and control, regular budget reviews, cost benchmarking, and supplier negotiations)
- Place timely bids on upcoming projects to maintain a steady cash flow
- Improve efficiencies by aligning workflows, project schedules, and staffing levels with the expected workload
To use this strategy effectively, subcontractors should maintain accurate billing records, establish clear billing processes, and use financial intelligence software to analyze historical billing data and generate projections.
Conclusion
Smart cash flow management separates successful electrical contractors from those merely surviving. These strategies offer a blueprint for financial resilience in an industry notorious for payment delays. And while these approaches may require an initial investment in time and possibly technology, the return in terms of improved cash flow and reduced stress makes them well worth the effort.
Claire Wilson is a co-founder at Siteline, a billing software company for subcontractors. Before Siteline, she worked in construction as a project manager at Tishman Construction in New York City on huge projects like Hudson Yards and JP Morgan’s Corporate Headquarters.