Construction Invoicing: Definition, Tips, and Traps to Avoid
If you’re a construction company owner, manager, or contractor, you know that construction invoicing is crucial for smooth business operations. Digging through purchase reports and job orders is time-consuming but effective invoicing keeps your business successful and profitable.
A good system for construction invoicing helps you seamlessly manage your company’s accounts receivables and tackle overhead accounting, slow payments, and other challenges. Also, considering the construction industry’s credit-heavy nature, creating timely and accurate construction invoices is essential to get payments sooner and maintain sufficient liquidity.
In this article, we share our five favorite construction invoicing tips and tricks to help you get paid on time and stay profitable.
What Are Construction Invoices?
Construction invoices are documents that contractors, subcontractors, and suppliers use to determine the dues that their clients owe them. These documents also state payment deadlines, helping construction companies track deadlines for receiving payments.
Construction invoices create an account receivable by establishing a payment obligation. They are essentially written records of purchase agreements and help keep cash flowing into a business.
What Is the Difference Between Invoicing and Billing?
Although invoicing and billing technically describe the same function, they have minor differences. Companies send invoices to their clients for intangible services and bills to customers for tangible products.
How Do I Make an Invoice for a Construction Company?
What should a construction invoice look like? Depending on your project’s type and scale, here are the details you must add to a construction invoice:
- Project name
- Client’s name and address
- Contractor’s name and address
- Invoice number and date
- Project details and description
- Payment terms and conditions
- Total amount due
- The total value of work to date
- Remaining costs
- A detailed list of work completed, percentage of work completed, or milestones reached
- Costs of services, labor, building materials, and other resources
- Any change orders
- Retainage (a portion of the payment retained by the client until completion of work)
- Details of previous payments
Depending on the type of projects they take up, different construction businesses handle their invoicing in many ways and have various kinds of information on their invoices.
5 Tips and Tricks for Effective Construction Invoicing
How should contractors bill clients? To efficiently manage construction invoicing, here are the five best practices we recommend for invoicing success:
1. Accurately Record All the Invoice Details
Keep organized and accurate records of every detail related to the invoice you must create, including hours worked, money spent, and agreements made. You will get paid for the work you document, so maintain proper documentation by keeping timesheets and receipts from projects.
A clear information trail also helps you avoid confusion and validate contract prices and payment terms if disputes arise.
2. Create Clear and Detailed Invoices
Ensure the client knows what they must pay for by providing enough details that support the requested payments. Avoid listing unnecessary information that can make the invoice confusing. Standardized invoices help you solve this issue by offering a uniform method and a basic format for listing work that has been performed.
Although specific details listed in invoices may differ from project to project, a consistent format keeps your business organized and provides clients with clear statements. It also helps your company avoid errors while coming across as professional and reliable.
Also, always add references to quotes or estimates to avoid discrepancies between invoices and the initial quotes or estimates. It helps clients understand how you set prices for your services and avoids confusion.
3. Keep Payment Terms Short and Reasonable
Irrespective of the billing method you select, you and your clients must agree on the calculation of prices and payment deadlines. Establishing clear payment terms and instructions with detailed descriptions leaves no room for ambiguity and avoids mistakes, miscommunication, and disputes.
Do not be afraid to ask clients for better payment terms, and don’t accept cumbersome payment plans. Secure better terms by establishing trust and collaborative relationships with your clients.
4. Send Timely Invoices
A simple way to ensure timely payments from clients is to send invoices on time. Delaying invoices sent leads to confusion, late payments, business uncertainty, and potential bad debts and losses.
Send invoices to clients quickly while being reasonable. It will ensure your clients receive invoices while your work is still fresh in everyone’s minds.
5. Leverage Technology
Creating construction invoices requires loads of complex information, detailed records, and math skills. Using the right technology like inventory management systems or spreadsheets helps you keep track of the materials and other resources used in different projects. In turn, it helps you quickly prepare invoices for your clients while freeing up valuable time and energy.
Nest Egg’s digital inventory system allows you to assign each project to the correct physical location. It helps you easily track inventory and prepare reports and invoices.
Traps To Avoid in Construction Invoicing
Here are a few common pitfalls in construction invoicing that you must steer clear of and tips on how to deal with them:
1. Scope Creep and Change Orders
Not preparing your construction business for scope creep and change orders is a huge mistake since it may send your best-planned projects off the rails.
Anticipating these issues early helps you avoid misunderstandings, disputed prices, project delays, and other complications. It also helps you stay on top of your projects, meet deadlines, and get your well-deserved payments.
To solve this challenge, follow our simple tips below:
- Craft and adopt a pre-defined approval process for change orders.
- Ensure clear communication between involved parties about work completed.
- Create a separate section in your invoices for costs related to change orders.
- Track changes using advanced software tools like Nest Egg’s inventory system. This will help you track assets and materials used for different projects and changes.
2. Unpaid Bills
Despite sending timely invoices and following the best practices we mentioned above, you may have to deal with unpaid bills. Not receiving payments from clients on time can set your business back and leave you with no cash to run your operations.
So, what should you do when you have unpaid client invoices?
Follow Up on Unpaid Invoices
You may feel apprehensive about following up on an unpaid invoice as you may fear it may damage your business relationship. But following up on unpaid invoices is acceptable and integral for recovering timely payments. It is an essential function and part of your day-to-day business operations.
So, you must not feel shy about contacting clients who haven’t paid their bills on time and asking them for payments. Also, most clients are reasonable enough to share their reasons for delayed payments and discuss a way forward. So, talk it out with clients when you feel you may have to deal with potential payment issues in the future.
It will help you identify the cause of the delay and understand how long you may have to wait for the payment. It can also help you determine the next steps that may be necessary to recover payments.
Make Payment Demands
After you’ve followed up on an invoice a few times, it may be time to take more drastic action, that is, make payment demands. Sending a document like a notice of intent to lien can help your clients know that you are serious about recovering payments. It also provides an opportunity to resolve the problem without resorting to immediate legal action or a lien claim.
Note that many clients do not take kindly to lien threats. Although a notice of intent to lien is an excellent way to recover payments, you must back up your payment claim with sufficient documentation.
You can also make payment demands without using a notice of intent to lien. You can send payment demand letters threatening legal action like a prompt payment claim, breach claim, or retainage claim. This simple document goes a long way in recovering payments, especially when you send it through an attorney.
Take Legal Action
When push comes to shove, you must use the right payment recovery tools like mechanics lien claims and payment bond claims. These powerful recovery tools provide options for payment recovery that are not as slow, costly, and risky as litigation. Where liens and bond claims are unavailable, pursue legal action or take your case to a small claims court.
However, it’s best if you leverage these tools for faster payments rather than moving forward with them.
Construction businesses and professionals have unique invoicing practices that work best for them. Nonetheless, there is always room for improvement. Our best practices for construction invoicing can help you avoid misunderstandings, pricing disputes, project delays, and other common issues that plague the construction industry.
Nest Egg also offers a smart stock management system that you can use to efficiently track your construction materials. Our next-generation inventory management software for small and large inventories is intuitive, fast, scalable, and flexible. It helps you enjoy time and cost savings so you can manage your inventory and logistics hassle-free.
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