Accounts Receivable is rarely a straightforward task for UK construction companies. This is primarily due to various factors; chief among them is late and delayed payments. Delayed payments lead to poor cash flow where construction companies struggle to manage operational costs. As per studies, the industry in general has seen a rise in payment delays; with construction companies experiencing some of the worst payment performance across the UK.
To cope with this problem, there is a need to streamline cash flow to ensure availability of sufficient funds when the need arises. A crucial first step is to get their Accounts Receivables in order. In this blog, we take you through a detailed analysis of accounts receivable; from very basic concepts to more complex issues. We also discuss the benefits of construction accounts receivable services and foreseeable challenges that companies should be aware of.
What Is Accounts Receivable for Construction Companies
Accounts receivable in the context of construction companies refer to payments yet to be received. These collections are classified as current assets on the company’s balance sheet. Proper management of accounts receivable is crucial for maintaining healthy cash flow, ensuring the company has sufficient liquidity to cover operational expenses.
Benefits Of AR Services for Construction Companies
Some of the benefits offered by a reliable AR service include specialized solutions to optimise cash flow, allow faster payments, and assist in handling complex billing processes. The section below lists more benefits of AR services:
Managing Interim Applications and Certifications
Interim applications lead to payments received by construction companies in stages. These applications are an essential tool for maintaining cash flow throughout a project’s lifespan, rather than waiting for a single, final payment at its conclusion.
AR services make sure that the interim applications are prepared correctly, are submitted on time and closely supervised through the certification process. The details in the applications are monitored closely by the service provider. In case of any kind of discrepancies, the services follow up immediately to minimise delays between certification and payment.
Mismanagement of Payments
Mismanagement of payment can have big repercussions, as this led to losing potential significant revenue losses, disruption in cash flow, and damaged vendor relationships. These issues can be avoided all together through qualified AR services provide structured credit control accounts that include regular monitoring of debtor ageing reports and continuous follow-ups once payments become overdue.
They help construction companies maintain professional records and ensure that overdue balances do not gather unchecked. This structured approach decreases debtor days and provides strength to the company’s overall working capital position.
What Are Major AR Challenges in Construction Companies?
The challenges for accounts receivable arise from extended payment cycles, complex valuation processes, legal notice requirements and more. Below are the AR challenges faced by construction companies that can create an obstacle while creating plans for growth and can even lead to insolvency.
Late Payments and Elevated Days Sales Outstanding (DSO)
DSO refers to a financial metric that measures the average number of days it takes a company to collect payment. High DSO is not a suitable condition for the construction company as it shows that a company takes a long time in collecting payments from the creditors. It leads to operational and cash strain.
It is one of the most common challenges faced by construction companies. Usually, the contract specifies 30-day terms; however, the payment often exceeds 60 or even 90 days. This can happen due to reasons like administrative backlogs, internal approval delays, and cash flow issues at the client level.
Late payments can disrupt the cash flow and therefore managing expenses can become difficult. As construction projects need continuous outlay for materials, labor and subcontractors, late payments can quickly put a burden on the working capital. It can negatively impact the construction companies’ ability to plan for future growth.
Invoicing Errors Leading to Payment Disputes
Incorrect invoicing plays a major role in getting delayed payments and cash flow instability. Construction billing is based on applications for payment under contracts like New Engineering Contracts (NEC) or Joint Contracts Tribunal (JCT). It is necessary for these applications to strictly comply with contractual terms, show approved variations, include correct valuations, and meet statutory requirements.
Even small errors like missing supporting documents, wrong calculation of retention percentages or submitting an application after the given time can lead to rejection or the issuance of a pay less notice.
Payment disputes usually happen when there are discrepancies between the contractor’s valuation of the work and the payer’s evaluation of completed work. In case there is no clear documentation, it can lead to disputes, delayed cash receipts, and increased administrative costs.
Complex Cost Evaluation Certification Process
In the UK construction industry, the valuation and certification process is way more complex than standard invoicing. It involves interim applications for payments depending on the value of work completed during a specific time. It must be submitted by contractors. It is important that these applications are assessed and certified before payment is due.
The applications must follow the processes mentioned in the contract. The application must also comply with the Housing Grants, Construction, and Regeneration Act 1996. This shows that revenue recognition and cash collection are majorly dependent on contract compliance and correct documentation.
In case the valuations are incomplete, challenged, or do not have support documents, the certification may be delayed or reduced. Even small errors in valuation can result in delayed payments, which increases the collection period.
Risk Of Client Insolvency
Client insolvency risk is a serious challenge for UK construction companies. It is because of long payment cycles, retention practices, and high contract values. Construction projects usually involve scheduled payments retained until the completion of the project. Therefore, there can be significant receivable balances at any specific time.
In case a client gets insolvent, the outstanding receivables can be delayed or can immediately convert into bad debts. This can undermine the company’s financial stability in the worst way possible.
Poor Cash Flow Visibility
Lack of Cash Flow visibility is a critical challenge for construction companies operating in the UK. It is owing to the complex payment structure, dependence on certifications, and long project cycles. The construction companies depend on interim applications for payment. This interim application must be assessed, certified, and in some cases adjusted before payment is made. This creates an uncertain situation regarding when the payment will be received and how much it will cost.
Even when a specific time is mentioned in the contract for receiving the payment, there can be delay in receiving the payment. Certification may be reduced; disputes over imbalances or pay less notices may be issued. As a result, the cash inflow hardly matches the original valuation submitted. Without accurate and real-time reporting, the company can never understand its true financial position.
Conclusion
Opting for AR services presents a myriad of advantages that empower construction companies to allocate their time and resources more effectively towards their core business activities. By leveraging augmented reality, these companies can significantly enhance on-site efficiency, which translates into quicker decision-making and improved collaboration among team members.
Additionally, AR services streamline project management by facilitating better communication among all parties involved, including architects, engineers, and contractors. Enhanced visualization helps ensure that everyone is aligned with the project goals and timelines, promoting accountability and transparency throughout the construction process.
