Invoicing in Construction: Understanding the Basics
When it comes to success in construction, most contractors measure it by keeping track of cash flow. Since retaining cash flow and building the economic strength of the construction firm depends completely on the project billings and payroll, invoice management is essential to keep things under control. Also, the need to keep the ongoing and upcoming projects in place demands invoicing that can clearly communicate all payments and dues.
Since the invoicing process makes a significant contribution in ensuring precise accounting, most contractors prefer to keep their billing and invoice process on a construction accounting software. Such an arrangement not only helps to avoid disputes but improves cash flow, adding value to reputation and project pipeline.
As invoicing is one of the crucial business subjects associated with business success in the construction industry, ProjectPro brings you a detailed guide on invoicing. This guide will not only help you to understand the basics but will also share essential insights on the importance of invoicing as well as tips to assist with quicker payments. Let us begin.
Anatomy of a Construction Project Invoice
A project invoice in construction can be considered as a formal request for payment made against the job completed or consumption of material and resources that bills a specific amount. Unlike the job quote, the rough estimate where most construction jobs begin, invoices are the actual amounts charged against the work performed. In most cases, the invoice is a document which is composed of the following details:
- The name of the construction company/contractor along with their contact details
- The name of the project owner or customer with their contact details
- The date of issue for the invoice
- The due date to make the payment mentioned on the invoice
- A brief detail of item descriptions along with their units, hours and costs
- Terms of the payment
Above all, it is necessary that the invoice data related to the project should be made through written documents from the date of commencement of the contract and the project. This helps to avoid any type of discrepancies in the information, especially when financial data is involved. Also, clearly documented and dated invoices make it easier for both contractors and project owners to keep their rights protected.
Understanding Terms of Invoice Payment
The terms of invoice payment can be defined as the duration for which cash is due, including the conditions related to the discount which can be applied by making payments before the due date. For instance, a common term that can be found on most invoices is “Net D” where D specifies the number of days until payment is due.
Some of the other abbreviations that can be found on the invoice include “Discount/due date of the payment to avail the discount offer, followed by the actual due date.” For instance, if a contractor offers a 2 percent discount against the payment which is made within the first 7 days of the issuing of invoice with an actual due date of 30 days, the invoice may have it defined as, “2/7 Net 30.”
Some of the other terms which a user could find on the invoice may include specification of the payment process as well as penalties related to the payment made after the due date. For instance, the payment processor mode of payment for a specific project task could be a certified check or transfer made from one bank to another. Aside from this, the invoice terms should also include guidelines on late payments which must be aligned and discussed during the agreement of contract.
Importance of Timely Invoicing
Even though most contractors these days have moved to construction accounting and project management software to meet their invoicing needs, the method of accounting used to generate invoices also affects the financial statement of the business. For instance, tools like ProjectPro keep all account receivable data in the timesheets for easier access. Also, the record keeping of all such information makes it extremely convenient to track income as well as assets owned by the firm improving overall preciseness with financial statements.
As long as it is concerned with the contractors, invoicing delays could cause an indirect impact on profit. For all the “underbilled” jobs that result from the unbilled progress, it can be assumed that the further progress of the project is made by the contractor using their own finances. Though it may appear to be a strategy that can help avoid taxes on income, such practices could result in difficulty in the adjustment of accounting data. Such information may also make a particular job appear to be a loss that otherwise may have counted to be profitable. This may make the contractor pay taxes on income which is yet to be earned.
On the other hand, the firms which are already keeping their data on construction accounting software tend to have a stronger record of receivables with complete insights into what is owed. Also, the accounting reports available with the software solution can be fetched to track due receivables which ultimately improves invoicing process and timely payments from the customers.
Faster Payment with Invoicing Guidelines
Though the profit margins for income in the construction industry are already thin, offering incentives on quicker payments is always a good idea. Also, doing so could help avoid late payments and delays which may bring expenses to the contractor.
Interests on Late Payments
If the idea of discounts may not appeal to you, as they may decrease your income, contractors could get an advantage in the form of pre-defined penalties on late payments. These penalties could be described in the form of interest on payment overdue. However, it is necessary that such a clause must be defined in the contract as a practice to incur overdue amounts.
Identify Dues and Owed Amount
Long billing cycles are no longer a standard construction practice, especially when it is common to have the due amount pending for less than a month. Nevertheless, it is necessary for the contractor to ensure payment disbursements are made as soon as the invoice is issued. In other words, the contractor has full right to ask for the payments and not necessarily wait for 30 days specified on the invoice to get the payment reflected in their account.
Tracking Receivables with Tools
Though Spreadsheets are still in use, they are outdated. Using advanced construction accounting software makes it easy to avoid loads of printed invoices and piles of papers. Based on Dynamics 365 Business Central, the modern tools allow tracking of invoices based on time. Overall, it enables tracking of receivables easier for both the parties i.e. clients and the contractor.
Down To Business Approach
Last but not least, it is essential that your firm has a dynamic business strategy that must have a “down to business” approach. Also, it must entirely be the responsibility of project managers and the office staff to keep track of unpaid invoices. Following this, the team must design a reminder plan in which emails and formal phone calls can be scheduled to ensure timely payment.
The Crux: Need for Invoice Planning
Contractors must issue invoices to the customers within the shortest amount of time once a job is completed. Though it is natural to have a need for time to process the invoices, delayed invoices may increase the gap with payments for future tasks. Since preparing invoices may take time, it is crucial to have a robust construction accounting solution and a regimented internal process in place. These practices will help retain cash flow and revenue productivity by providing on-time invoicing.
Looking for construction accounting and ERP software to help you get over invoice management issues along with resource management capabilities? Let ProjectPro be your companion for success with your construction business. Call today !