Getting Paid Faster: Accounts Receivable Management for Contractors | Projul

You finished the job. The client loves it. You send the invoice. And then… nothing. Two weeks go by. Three weeks. A month. You call and get voicemail. You email and get a promise. Another two weeks pass.

Meanwhile, your material supplier wants their money. Your subs are calling. Payroll is Friday. And the $47,000 sitting in your accounts receivable might as well be Monopoly money because you can’t spend it until it hits your bank account.

Construction accounts receivable management is the difference between a profitable company and one that’s profitable on paper but broke in practice. This guide covers everything you need to get paid faster: DSO benchmarks, invoice aging, lien rights, progress billing, retainage, and the systems that keep cash moving.

Why Construction AR Is Uniquely Difficult

Accounts receivable in construction is harder than in almost any other industry. Here’s why:

Long project timelines. A job might take 6 months. If you bill at completion and the client takes 45 days to pay, you’ve financed 7.5 months of labor and materials before seeing a dollar.

Multiple parties in the payment chain. The owner pays the GC, the GC pays the subs, the subs pay their suppliers. If anyone in that chain holds up payment, everyone downstream suffers. You did perfect work and you’re still waiting because the owner hasn’t paid the GC.

Retainage. Most commercial contracts hold back 5% to 10% of every payment until project completion or beyond. On a $500,000 subcontract, that’s $25,000 to $50,000 sitting in someone else’s account for months after you’ve finished.

Disputed work. Construction involves subjective quality assessments. A client might withhold payment because they’re unhappy with something, even if the work meets spec. Now you’re not just collecting, you’re negotiating.

Seasonal cash flow. Many trades have busy seasons and slow seasons. If your AR is slow during the busy season, you’re entering the slow season with depleted reserves.

Understanding DSO: Your Cash Flow Speedometer

DSO stands for Days Sales Outstanding. It measures the average number of days it takes to collect payment after you send an invoice.

DSO = (Accounts Receivable / Total Credit Sales) x Number of Days

For a simpler monthly version: take your total AR at the end of the month, divide by that month’s revenue, and multiply by 30.

DSO Benchmarks for Construction

• Under 30 days: Excellent. You’re collecting fast, probably with progress billing and proactive follow-up.
• 30 to 45 days: Good. This is where most well-managed contractors land.
• 45 to 60 days: Needs attention. You’re carrying too much receivable and it’s hurting cash flow.
• 60 to 90 days: Problem territory. You’re financing your clients’ projects. Time to overhaul your billing and collection process.
• Over 90 days: Crisis. You likely have uncollectable invoices dragging up your average. Address them aggressively or write them off.

Improving Your DSO

Cutting your DSO by even 15 days can free up significant cash. On $3 million in annual revenue, reducing DSO from 55 to 40 days puts roughly $123,000 back in your operating cash. That’s money you had already earned sitting in someone else’s account.

Invoice Aging: Your Early Warning System

An aging report breaks your outstanding invoices into buckets based on how long they’ve been unpaid. Standard buckets are:

• Current (0 to 30 days): Normal. These are working through the payment cycle.
• 31 to 60 days: Yellow flag. Follow up now. Don’t wait.
• 61 to 90 days: Red flag. Escalate. Phone calls, not emails.
• Over 90 days: Active collection mode. Demand letter, lien filing, or attorney.

The Collection Probability Curve

Here’s the uncomfortable truth about aging invoices:

• At 30 days past due, you’ll collect about 95% of the time
• At 60 days, that drops to 85%
• At 90 days, it’s around 73%
• At 120 days, it’s below 65%
• At a year, you’re looking at 50% or less

Every day an invoice sits unpaid, it becomes harder to collect. That’s why the aging report matters. It tells you which invoices need attention right now before they slide into the danger zone.

Running Your Aging Report

Pull an aging report weekly. Not monthly. Weekly. Look for:

1. Any invoice over 30 days that doesn’t have an active follow-up scheduled
2. Any client with multiple aging invoices (pattern problem)
3. Total dollar amount in each bucket and the trend over time

If your 60-plus bucket is growing month over month, your collection process has a leak.

Progress Billing: Stop Waiting Until the End

If you’re billing at project completion, you’re doing it wrong. Progress billing means invoicing at regular intervals based on work completed, typically monthly.

How Progress Billing Works

1. At the end of each billing period, assess the percentage of work completed for each line item in your contract
2. Calculate the amount earned to date
3. Subtract previous billings
4. Subtract retainage (if applicable)
5. The remaining amount is your current invoice

AIA-Style Billing

Commercial projects typically use AIA G702 and G703 forms (Application and Certificate for Payment). These standardized forms break down the contract into a schedule of values and track progress billing against each line item.

Even if you’re not required to use AIA forms, the concept is sound. Breaking your contract into a schedule of values and billing against it gives both you and your client clarity on what’s been earned and what’s been paid.

Why Monthly Billing Matters

Consider a $300,000 project that takes 6 months:

Without progress billing: You invoice $300,000 at the end. The client takes 45 days to pay. You’ve carried all costs for 7.5 months. If your direct costs were $210,000, you funded $210,000 out of pocket for over half a year.

With monthly progress billing: You invoice roughly $50,000 per month. You’re collecting cash throughout the project. Your maximum out-of-pocket exposure at any point is maybe $70,000 to $90,000 instead of $210,000.

Progress billing doesn’t just improve cash flow. It reduces risk. If a client stops paying in month 3, you’ve collected $100,000 to $130,000 instead of nothing.

Retainage: The Money You Earned But Can’t Touch

Retainage (also called retention) is the percentage of each progress payment that the owner withholds as security until the project is substantially complete. It’s standard practice in commercial construction and increasingly common in residential.

Typical Retainage Rates

• Standard: 5% to 10% of each payment
• Some states cap retainage at 5% by law
• Federal projects: typically 5% under FAR guidelines
• Some contracts reduce retainage to 5% after 50% completion

The Cash Flow Impact

On a $1 million subcontract with 10% retainage, you have $100,000 withheld throughout the project. That money doesn’t come back until substantial completion, which might be months after your work is done because you’re waiting on other trades to finish.

For a specialty contractor running multiple projects, total retainage receivable can easily reach $300,000 to $500,000. That’s a significant amount of capital tied up in money you’ve already earned.

Tracking Retainage

Retainage should be tracked separately from regular AR. You need to know:

• Total retainage outstanding by project
• Expected release date for each project
• Any conditions required for release (punch list completion, final inspection, closeout docs)
• State-specific deadlines and rules

We cover this in detail in our construction retainage tracking guide.

Lien Rights: Your Most Powerful Collection Tool

Mechanic’s liens are a contractor’s nuclear option, and they work. A mechanic’s lien is a legal claim against a property for unpaid construction work. It clouds the title, making it difficult or impossible for the owner to sell or refinance until the lien is resolved.

How Liens Work as a Collection Tool

The threat of a lien often prompts payment faster than anything else. Property owners and their lenders take liens seriously because they create legal liability tied to the property itself.

Here’s the general process:

1. Preliminary notice: Many states require you to send a preliminary notice at the start of work to preserve your lien rights. Miss this deadline and you lose the right to lien. Send it on every project, every time.

2. Demand letter: Before filing a lien, send a formal written demand. Reference your lien rights and the filing deadline. This alone resolves many payment disputes.

3. Lien filing: If the demand doesn’t work, file the mechanic’s lien with the county recorder. This puts the world on notice that you have a claim against the property.

4. Lien enforcement: A filed lien usually needs to be enforced through a lawsuit within a specific period (6 to 12 months in most states). But most liens are resolved before it gets to court.

Critical Lien Deadlines

Lien laws vary dramatically by state. Some key variables:

• Preliminary notice deadline: 20 to 30 days from start of work in most states that require it
• Lien filing deadline: 60 to 120 days after last furnishing labor or materials
• Enforcement deadline: 6 to 12 months after filing

Miss any of these deadlines and your lien rights disappear. Put them on your calendar the day you start every project. Better yet, use software that tracks them automatically.

When to Use Lien Rights

Don’t file a lien on every slow-paying client. It’s a serious step that can damage relationships. Use it when:

• Payment is significantly past due (60-plus days)
• Communication has broken down
• The amount is substantial enough to justify the process
• Other collection methods have failed

But do send preliminary notices on every project. They cost almost nothing, preserve your rights, and most clients never even notice them.

7 Strategies to Get Paid Faster

1. Invoice the Day Work Is Complete

Don’t wait until the end of the week or the end of the month. The day a milestone is complete or a billing period ends, send the invoice. Every day you delay billing is a day added to your collection timeline.

2. Make Invoices Crystal Clear

Vague invoices get questioned. Questioned invoices get delayed. Your invoice should include:

• Exact scope of work completed
• Reference to contract or change order number
• Backup documentation (time logs, material receipts, photos)
• Clear payment terms and due date
• Where and how to send payment

If a client’s AP department has to call you for clarification, you just added two weeks to your payment timeline.

3. Set Up Auto-Reminders

Send a reminder 7 days before payment is due, the day it’s due, and 3 days after it’s past due. Automated reminders through your invoicing software keep you top of mind without you personally chasing every dollar.

4. Offer Multiple Payment Methods

Make it easy to pay you. Accept ACH transfers, credit cards, and online payments. The harder you make it to pay, the longer it takes. If a client has to mail a physical check, that’s 5 to 7 days of transit time you could have saved.

5. Negotiate Better Payment Terms Up Front

Before you sign a contract, negotiate payment terms. Push for Net 15 or Net 20 instead of Net 30. Include late payment penalties. Specify that retainage will be released within 30 days of your scope completion, not overall project completion.

The time to negotiate is before you sign, when you have the most bargaining power.

6. Bill for Stored Materials

If you’ve purchased materials for a project and they’re stored on site or in your shop, bill for them. Your cash bought those materials. Don’t carry that cost until installation. Most contract formats, including AIA billing, have a line item for stored materials.

7. Build Relationships With the Right People

Know who actually approves payments at your client’s company. It’s rarely the project manager. Build a relationship with the accounts payable person, the controller, or whoever signs the checks. When you need to escalate, knowing the right person to call makes all the difference.

Setting Up Your Collection Process

A collection process shouldn’t depend on your memory. It should be a system that runs the same way every time.

The Collection Timeline

• Day 1 (invoice sent): Confirmation email or call that the invoice was received
• Day 25 (5 days before due): Friendly reminder that payment is due in 5 days
• Day 30 (due date): Payment due. If received, great. If not, proceed.
• Day 35 (5 days past due): Phone call. Not an email. A phone call. “Just checking on invoice #1234. Is there anything holding up payment?”
• Day 45 (15 days past due): Formal written notice referencing late fee terms in the contract
• Day 60 (30 days past due): Demand letter referencing lien rights. Send certified mail.
• Day 75 (45 days past due): File preliminary steps for lien. Notify client in writing.
• Day 90 (60 days past due): File mechanic’s lien or refer to collections attorney.

Document Everything

Keep records of every communication about payment. Save emails. Note phone calls with dates, times, and what was discussed. If you ever end up in a lien action or lawsuit, your documentation will make or break your case.

How Software Changes the AR Game

Managing construction accounts receivable in spreadsheets or on paper works until it doesn’t. The typical failure mode is an invoice that slips through the cracks and ages into uncollectable territory because nobody was tracking it.

Construction management software like Projul changes the equation:

• Invoices generate from completed work. When a milestone is done, the invoice pulls from your schedule of values automatically. No retyping numbers.
• Aging reports update in real time. You always know what’s outstanding and how old it is.
• Automated reminders go out on schedule. Your collection timeline runs itself.
• Payment history lives in one place. Every payment, every invoice, every communication, tied to the project and the client.
• Retainage tracks separately. You can see total retainage outstanding across all projects at a glance.

The contractors who struggle most with AR are the ones who treat billing as an afterthought. They finish the work, get busy on the next project, and remember to invoice two weeks later. By then, they’re already behind.

Software doesn’t fix bad contracts or bad clients. But it eliminates the self-inflicted wounds that come from disorganized billing and inconsistent follow-up.

What to Do This Week

1. Pull your aging report. If you don’t have one, make one. Right now.
2. Identify every invoice over 45 days. Call each client today.
3. Check your lien deadlines on every active project. If you haven’t sent preliminary notices, find out if you’re still within the window.
4. Set up a standard collection timeline and commit to following it on every future invoice.
5. If you’re still billing at project completion, switch to monthly progress billing on your next contract.

Cash flow kills more construction companies than bad work. You can be the best builder in your market and still go under if you can’t collect what you’ve earned. Fix your AR process and the rest of your business gets a lot easier.