Managing Payment Risk in Construction — Strategies to Improve Cash Flow
Construction is an industry with razor-thin profit margins, often less than 2%, making effective financial management critical. Unfortunately, the focus tends to be heavily skewed toward project management without equal attention given to securing healthy cash flow. Late and non-payments are a huge risk that can quickly spiral a construction business into financial distress if not properly mitigated.
In this video on YT, I share my insights as a construction finance expert on how to identify and reduce payment risk in construction contracts.
Here are some key takeaways:
How to Identify Payment Risk
- Check client creditworthiness — Assess their financials, payment history, credit rating
- Scrutinize contract payment terms — Look for delays, conditions imposing barriers to payment
- Evaluate project financial viability — Review funding docs to confirm adequate financing
Managing and Mitigating Payment Risk
- Negotiate clear, balanced payment terms you can work with
- Consider an escrow account, especially for retainage
- Structure payments around milestones
- Include late payment penalty clauses
- Implement a consistent invoicing system
Benefits of Effective Payment Risk Management:
- Improved cash flow predictability
- Reduced financial stress from payment delays
- Enhanced business reputation as you build market trust
Financial management gets overlooked but is critical to construction success. Use these proactive checks and balances around payment in your contracts and processes to promote healthy cash flow, reduce uncertainty, and demonstrate credibility with owners and vendors.
Be sure to check out the video where I explain these recommendations in more detail and provide examples for putting them into practice.
-
Did you know that you can find me around the Internet?
Go and support me here:
Youtube: https://www.youtube.com/@TheConstructionContract
Podcast: https://open.spotify.com/show/7GvIHn2DkgNxe3qD1fjPS5
Website: https://www.theconstructioncontract.com/
Linkedin: https://www.linkedin.com/in/patriciahaywoodesq/
And when I am not on the Internet writing or speaking my random thoughts, you can find me in the real world living my best life.
