Why are late payments such a problem in construction?

Delayed payments in construction aren’t just a hassle to handle. They come with both clear and hidden costs. In fact, slow payments cost construction businesses a whopping $280 billion in 2024, according to a study by construction industry expert Rebbet. This guide will help you avoid and manage delayed payments so you can keep your business running smoothly.

Delayed payments are common in construction due to the nature of the work and industry norms. Specifically:

• Construction projects often require a sizable financial investment. Clients may encounter unexpected expenses, financing difficulties or cost overruns that make it difficult for them to pay on time. Some also may simply be hesitant to hand over such a large sum of money (whether consciously or unconsciously) and drag their feet on payment.
• The construction industry is prone to long payment cycles. Often, construction companies must complete a substantial amount of work before any payments are made, and all the work must be thoroughly documented. This means construction companies often wait months after beginning work to send their first invoices, and may wait even longer between invoicing and payment. Clients also might question the work completed and request changes or additional documentation, increasing the delay.
• Payments are tied to job satisfaction. If a client is not happy with any aspect of the work, they might withhold payment for the job until it’s fixed.

Common reasons for delayed payments

While all clients and projects differ, there are a few common reasons for late payments in the construction industry. Once you’re aware of them, you can put processes in place to reduce them going forward. 

The most common reasons for delayed payments in construction include:

• Unclear payment schedules or miscommunication. All of your contracts for construction projects should clearly state when payments are due, whether they’re based on work milestones or specific dates. Make sure to thoroughly document all work completed — using construction software, such as Houzz Pro, can make this much easier.
• Lack of reminders. Out of sight often means out of mind. If you don’t automatically send out payment reminders, you run the risk that the client will forget. 
• Inconvenient ways to pay. Having to write out a check and hand-deliver it or drop it in a mailbox isn’t convenient for anyone, and clients may put off doing so. It’s better to take payments online.
• Client funding difficulties. If a client’s financing falls through, their financial situation changes unexpectedly, or they lose funding for any other reason, chances are that they will be late in paying you. 

Tips: Offer clients financing solutions yourself. Learn how to take payments online.

The consequences of slow payment for your business

Carrying costs in construction happens when clients don’t pay on time — you are carrying your client’s debt until they pay you. In addition to the visible impact of that outstanding payment on your profit and loss statements, slow payments can result in hidden costs that can add up to make a big impact on your bottom line. 

• Cash flow reduction. You might not be able to pay for immediate project costs — products, materials or services you need right now — which can cause project delays and a reduction in goodwill with your other clients.
• Time value of money. Money loses value over time — just ask anyone who used to pay 26 cents for a gallon of milk. This is due to inflation. Every day that passes, the amount you’re owed loses a bit of its value.
• Interest paid. If you need to take out a loan from a bank or another financial institution to cover costs while you’re waiting for clients to pay invoices, you’ll pay interest. Interest rates can vary greatly, both from institution to institution and from year to year. If you borrow from a credit card company (not recommended), rates are typically even higher.
• Interest lost. If you draw on savings to make up that cash flow deficit, you’ll be losing the interest that money would have earned. 
• Opportunity cost. Overly long payment cycles keep you from making business improvements — such as marketing, hiring more staff or investing in software.
• Slower business growth. The faster money comes in, the faster you can use it to build your business: paying for advertising to land more clients, hiring employees who can help you complete more projects, investing in software and equipment, and so on. Late payments mean growth will take longer.

Tips: Regularly analyze your cost accounting, and keep tabs on daily sales outstanding (DSO). Financial reporting software makes this much faster and easier.

How to manage late payments and protect your business

You can manage and minimize delayed payments using the following strategies.

1. Talk with your client. It might have been a simple misunderstanding, but even if not, open communication and having a good relationship with your client can make them care more about paying you. 
2. Offer a bonus for early payments. The bonus could be a discount, such as 5%, or an added service. 
3. Charge late fees. Having to pay an extra fee past the due date can incentivize people to pay on time. You can even increase the fee in increments based on how many days the payment is overdue.
4. Take online payments. Make things as easy as possible for the client to pay by accepting payments online.
5. Send payment reminders. A friendly reminder can help keep the due date on the client’s radar. After the due date has passed, you can send a construction late payment letter, which should include any fees for late payments as well as any other consequences. Most construction software solutions (including Houzz Pro) have options to send automated payment reminders, taking that administrative work off of your plate.
6. Use progressive invoicing. Breaking down a large sum into smaller increments paid over time can make it less daunting for clients — and help you get paid earlier.
7. Build the cost of late payments into your estimate or markup fee. Since payment delays are often an unavoidable part of doing business as a construction company, some business owners prefer to build those costs into their pricing up front. This could be as simple as increasing your markup by 1% or 2% across the board, or could involve adding up the costs listed above that your business incurs in a given year due to to late payments, and building in those costs to future estimates based on project size. 

Now that you know common reasons for delayed payments in construction, what they can cost your business and some strategies to manage them, you can minimize them and grow your business at the speed you want. 

Interested in growing your business faster? See “10 Ways to Increase Sales in a Construction Business.”

Does your business handle interior design as well? See “What to Do When an Interior Design Client Doesn’t Pay You.”