Topic Thread

Improving AR Collections

  • 1.  Improving AR Collections

    Posted 5 days ago
    We are a mid-sized specialty contractor working all over the US. As part of our Continuous Improvement program, we are looking at what best practices we can implement to improve our average AR collection time. We are pretty aggressive about following up on our AR, here are some of the best practices we have implemented to date:
    • We file a preliminary notice (or whatever notice may be required by statute where the project is located) to protect our mechanic's lien rights.
    • We will not execute contracts with "pay-if-paid" language and always try to negotiate language that allows us to stop work in the event of nonpayment for some specific period. We also try to negotiate favorable payment terms if permitted by the prime contract.
    • Our PM gets with the Client's PM or representative and submits a "pencil draft" of our billing several days before the billing cut-off date. Any negotiation of percent complete on a line item can occur at that time.
    • The approved pencil draft is submitted as our billing on or before the billing cut-off, along with any project-specific items required. We maintain a list of the project-specific requirements for each job so that it can be used as reference.
    • A day or two after the billing has been submitted we contact the Client's AP person to confirm receipt of the billing and any required attachments.
    • About a week before we expect the payment to be made (about 21 days after the billing was submitted typically), we reach out to the Client's AP contact to confirm an anticipated payment date, and to make sure there are no outstanding items needed for payment to be made.
    • Weekly follow up after the conversation above until the payment is received.
    • For larger payments, we offer our FedEx account to send payments and encourage wire transfers where possible.
    • If any issues arise during the above process, the PM or a Company executive get involved and to leverage relationships.
    Despite following what we feel is a pretty good process, we have seen our average AR days outstanding increase over the past few years. Many of our contracts are "pay-when-paid" whether that means that our client is a GC waiting for payment from an Owner, or an Owner waiting for funding from a lender. In those situations, the client has a built-in excuse that they cannot pay us until they get paid. It also seems that sometimes GCs do not actively manage their clients to push for prompt payment, which is frustrating.

    What other best practices for AR collection are we missing? I am interested in any ideas or processes that you have found to be successful. I am also interested in hearing from any GCs about how they manage their collections and what they have found to work well. Thanks in advance for your help!

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    Sarah D'Ambrosio
    Office Manager
    Outside The Lines
    Anaheim CA

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  • 2.  RE: Improving AR Collections

    Posted 4 days ago
    Following this thread because we have similar issues, but you have already implemented much more than we have in place!  I will be looking to follow up on many of your ideas and I'd love to hear what other folks have in place as well.  Thanks!

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    Lisa Donovan
    Director of Systems and Analytics
    Mann Wireless, Ltd.
    Ballston Spa NY
    (518) 587-2305
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  • 3.  RE: Improving AR Collections

    Posted 4 days ago
    Sounds like you are covering your basis.  We had a similar problem a couple of years ago.  We implemented credit checks and D&B searches before we would issue a bid.  This allowed us to turn down work that was likely to cause a collection problem.  We also worked to strike out all language in contracts that made our payment receipt dependent on the GC getting paid first.  We incorporated a clause in our terms and conditions that states should invoices not be paid at term that the customer would be responsible for late fees and interest related to collections up to and including legal fees if necessary.  We have also included an option to pay by credit cards (we add admin fees if they choose this method to cover the fees required when using this service).  Admin fees are typically much less than the late fees and interest​.  Customers that are good customers but are just slow to pay have moved to COD or Pre-pay before materials or any boots hit the ground on their job sites.  Some of these customers have also opted to purchases their own materials and we just have to show up to perform the work.  We had several upset folks when implementing these changes but they eventually found it easier on both them and us and they started changing their collections process with their customers to cover us and themselves.  We still encounter an occasional challenge but we leverage our attorney to draft on their letter head a demand letter as necessary.

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    Angela Defee-Hobbs MBA
    Controller
    Standard Utility Construction
    Fort Worth TX
    (817) 738-8400
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  • 4.  RE: Improving AR Collections

    Posted 4 days ago
    Hi Sarah!
    My firm works with construction companies throughout the US.  Your procedures appear very good.  You didn't mention the process of assessment of the GC's, Owners, Subcontractors with whom you may work, beyond the very good attempts at "terms negotiation".  Construction is a Risk Business.  Be sure to routinely review repetitively "late" payers.  Your CMFA members may be a help, along with other Construction Associations' members you may know to ensure that there aren't risks of non-payment/bad debts that exist and are unknown to you.  For your pay when paid contracts, just have the name of your customers principle payer to ensure that they are paying when paid; know the principle payer as noted up front and due your due diligence.  Some put in time clauses and penalties for payments exceeding a certain number of days regardless of the paid when paid clause (rarely seen this successfully negotiated, but it has been); and of course standards of days after payment when you are paid are important with substantial penalties that are collectible if that payment period is exceeded.  The world in the end is a "squeaky wheel" gets paid faster society, so keep up your earlier than payment date calls, create relationships with the people in the process of payment for insights and knowledge, and keep negotiating with clarity upfront on contracts.


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    Tony Burruano
    President
    Burruano Group
    Philadelphia PA - Naples, FL
    239.595.2149
    www.burruanogroup.com
    tonyb@burruanogroup.com
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  • 5.  RE: Improving AR Collections

    Posted yesterday
    Sarah,

    Great list, thanks for sharing. The one thing I would add is a process to understand and document the customer's payment process. For example, for some large GC's, we can contact the PM to get paid. For some smaller GC's, we have to go all the way to the owner to get paid every time. It may also be project dependent. For example, we had to go to a CFO to get paid, as the project was having an owner dispute we weren't aware of. Understanding who cuts the checks, who approves the checks, and who supervises each of these individuals is surprisingly helpful. I've seen a lot of AR agings over the years as a public accountant, and I learned this process from the company with the best AR aging I've ever seen (few over 30 days, none of 60, and no historical bad debt).

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    Wade Miller CPA, CCIFP
    CFO
    MTN, Inc.
    Englewood CO
    (970) 580-9007
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  • 6.  RE: Improving AR Collections

    Posted 6 hours ago

    Hello Sarah,

    As others have mentioned, you have a very good process in place.  I gained insight into billing & collection when we developed a couple of Cloud based solutions for a California based subcontractor.  One reduced the amount of time they spend on preparing and submitting AIA billings, and the other substantially reduced their DSO.

    In addition credit checks and everything you listed in your post, our client has two more steps.  

    • Each month billing (and if necessary collection) staff meet with PMs to review and suggest billing guidelines prior to PMs meeting with their clients.  
    • The collection App provides a more detailed view of customer balances at the job level, as well as, their total outstanding receivables.  When A/R staff follow-up with clients, they can remind them of any upcoming invoice, or a different invoice that may be past due. The ability to quickly access all collection notes from any location has proven to be very useful.  

    If you wish, I will be happy to forward your post to my client to see if they can offer any additional suggestions.

    Kindest Regards,
    Varoujan Adamian
    Principal Consultant
    Noravand
    Burbank, CA
    (818) 201-5111
    vadamian@noravand.com