Accounts Receivable in Construction: Why Getting Paid Is the Hardest Part of the Job
Getting the work done is only half the battle in construction. The other half? Actually getting paid for it.
Accounts receivable (AR) management is one of the most overlooked areas in construction businesses, yet it’s one of the most critical. Cash flow problems are the number one reason construction companies fail, and slow or unpaid invoices sit at the root of almost every cash flow crisis we see. Whether you’re a general contractor, subcontractor, or specialty trade, here’s what you need to know to keep your AR under control and your business financially healthy.
The Problem
Why AR Is Especially Complicated in Construction
Construction isn’t like a retail business where you sell something and get paid immediately. Money moves slowly and the payment chain is long. Here’s what makes AR uniquely challenging in this industry:
Long project timelines
Work can span weeks or months before an invoice is sent, and then payment terms stack on top of that. It’s not unusual for 60 to 90 days to pass between doing the work and receiving the money.
Retainage
Owners and GCs routinely hold back 5 to 10 percent of each payment until the project is substantially complete. That withheld money can sit out there for a long time, and it needs to be tracked separately from regular billings.
Pay-when-paid clauses
Many subcontract agreements include language that ties your payment to when the GC gets paid by the owner. These clauses can be legally enforceable in California and create real uncertainty around timing.
Disputes and change orders
Disagreements over scope, extras, or quality issues can freeze payments on otherwise healthy projects. Undocumented change orders are a leading cause of stalled payments.
Multi-party payment chain
Owner to GC to sub to supplier. The further down the chain you are, the longer you wait, and the more risk you absorb.
Warning Signs
Is Your AR Already in Trouble?
Most contractors don’t realize their AR is in trouble until cash gets tight. Watch for these early warning signs:
- Your average days sales outstanding (DSO) keeps climbing month over month
- You have invoices sitting past 60 days with no follow-up process in place
- You’re not tracking retainage separately from regular billings
- You’ve had to dip into a line of credit just to make payroll while waiting on a payment
- You’re billing at project completion instead of on a schedule throughout the job
If any of these sound familiar, your AR process needs attention before the next big project kicks off.
The Fix
What a Strong AR Process Looks Like
Here’s what we help our construction clients implement:
Use progress billing or schedule of values billings tied to milestones. Sending invoices at the end of a long project is how you end up waiting forever. A consistent draw schedule keeps cash flowing in throughout the job.
Many GC payment cycles are tied to a cutoff date. Miss it and you wait another 30 days. Set a standard that invoices go out within 24 to 48 hours of a billing milestone being hit.
Retainage isn’t just a footnote. It’s real money owed to you, and it needs its own tracking so you can follow up the moment substantial completion hits and that money becomes due.
A proactive check-in before an invoice is late is far more effective than chasing it down afterward. A quick email or call around day 20 of a net-30 invoice goes a long way.
California has strong mechanics lien laws that protect contractors and subs. Sending a preliminary notice on every project preserves your lien rights and signals to owners and GCs that you run a professional operation.
Not monthly. Weekly. You need to know exactly what’s current, what’s 30 days out, what’s 60, and what’s over 90. If you’re not reviewing this regularly, you’re flying blind.
When Things Go Wrong
What to Do When a Payment Goes Sideways
Even with a great process, disputes and slow pays happen. Here’s how to handle them:
- Communicate early and in writing. As soon as a payment is late, follow up in writing. Document every conversation.
- Stop work if the contract allows it. In California, contractors generally have the right to suspend work for non-payment after giving proper notice. Don’t keep working for free.
- File your lien on time. In California, a mechanics lien must be recorded within specific deadlines depending on whether you’re a direct contractor or a subcontractor. Miss those deadlines and you lose your leverage.
- Bring in your CPA or attorney early. Once a payment dispute reaches a certain size, professional guidance is worth far more than letting it drag on.
In construction, doing great work gets you the contract. Managing your AR well is what actually builds a sustainable business. If you’re not confident in your AR process, your invoicing schedule, or how you’re tracking retainage and aging, it’s worth taking a hard look before the next project starts.
Accounting Fresh works with construction and trades businesses across San Diego County to tighten billing, track job costs, and build the financial systems that support growth.
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