The system of payments in the construction industry is complex and interdependent. Each business relies on the others to send and settle invoices consistently to maintain the steady flow of funds that keep a project moving.
Improve the way your business processes payments to pay subcontractors more efficiently, and you could reduce your overhead, help maintain good industry relationships, and keep the money flowing between project stakeholders.
What are subcontractor payments?
Subcontractor payments are those that one contractor makes to another as a deposit for expected services or already completed work.
Payments within the construction industry often follow a trickle-down pattern, in which the owner pays a general contractor, who pays the subcontractors. The subcontractors, in turn, pay suppliers, and their subcontractors, if they’ve used them.
This pattern results in limited transparency between the owners and the team of subcontractors, including visibility in the flow of payments between businesses.
What are the benefits of streamlining subcontractor payments?
Streamlining subcontractor payments creates greater efficiency in your business by saving you from manual, repetitive tasks and giving your administrative team the time they need to move on to more meaningful work.
Saving this time can go even further to benefit the whole project, as it helps to:
- Maintain subcontractor relationships – When you pay on time, you increase the goodwill between you and your subs, making them more apt to prioritize your project.
- Improve contractor success – You rely on your subcontractors. Avoiding payment delays can help improve the health of their business. When they can pay their bills on time, they can keep projects moving.
- Allow subcontractors to pay/retain their talent – Contracting companies struggle to get and keep enough skilled labor to continue building. They must pay their labor regularly to maintain a workforce to keep your project running. Paying subcontractors on time can help them maintain those relationships.
Subcontractors are skilled crafts workers. The construction industry relies on their tools and expertise for each build. Creating efficient systems to ensure independent contractors get paid as quickly as possible benefits your business, the sub’s business, and the project as a whole.
How to streamline subcontractor payments
Paying subcontractors is not like doing employee payroll, for which many companies have opted for direct deposit to transfer money straight to workers’ bank accounts. Many generals still opt to mail checks to pay their contractors, which is time-consuming and lacks basic security measures prevalent in other industries.
Streamlining contractor pay processing involves creating a consistent and efficient system to pay invoices so that each transaction is smooth and predictable.
Tip #1: Establish clear payment terms
Payment terms are the rules business owners use to determine how and when to pay contractors for the work they perform. Likewise, a company often includes payment terms on a client invoice to indicate how and when it expects payment.
Payment terms can include
- The full contract sum
- Payment methods accepted
- Payment due date or expected payment schedule for progress payments and conditions for final payment
- Applicable late fees and interest charges
- Any other terms that can affect when the subcontractor will receive payment
Clear and well-established payment terms help general contractors and their subs structure their activities to maintain a healthy flow of money through their businesses.
Payment terms should be set out in the construction contract and signed before a project begins. Many general contractors include a pay-when-paid clause in their subcontractor agreements, indicating that they will only pay subcontractor invoices after receiving payment from the project owner. If a contract includes this clause, many local laws determine how it plays out, including how quickly contractors must pay their subs after receiving payment from the owner – often within 7-14 days.
Clear payment terms side-step the emotional aspects of payment that can come up mid-project and can better protect everybody in case of payment disputes. They eliminate case-by-case decisions that can delay the payment process.
Tip #2: Use online billing and payment platforms
Online billing and payment platforms help contractors produce, send, receive, and track invoices and payments digitally. They offer alternatives to complex and unreliable spreadsheets and file folders, often providing increased automation and improved payment processing speeds.
When you send funds through Truss, you can pay subcontractors faster. Subs can deposit funds into the bank account of their choice without having to sign up for a Truss account or suffering payment processing fees. Funds are available in 1-3 business days; if subs choose to sign up for a Truss account, they can access funds instantly.
Tip #3: Capitalize on automation to streamline payments
Paying a client used to involve a manual, labor-intensive process for the accounts payable team, involving:
- Tracking project completion and liaising with field staff to know when to pay
- Writing and printing a paper check, getting it signed, and mailing it
- Reconciling bookkeeping files with payments made and deposited
Online payment platforms automate much of this process, saving office staff time and avoiding errors that result from manual entry and re-entry. They also make it faster and easier for subcontractors to deposit funds.
Truss is an online payment platform that can connect to QuickBooks Online to create and track bills and payments. Contractors can import bills from their bookkeeping software to pay vendors directly through Truss. Payments are marked paid automatically in QuickBooks Online. Automated bookkeeping can make payment records more accurate and increase confidence in filing tax forms.
Tip #4: Track payments and monitor deadlines
Once a contractor has written and sent a check through the mail, there’s little transparency for the sender or recipient on when the funds will finally transfer from the sender’s account to the recipient’s. Meanwhile, the sub has to decide when and how to spend money for his business without those payment tracking details.
Truss offers a fully transparent payment option, with real-time tracking on every payment and estimated deposit dates. That additional information can make helps inform future project decisions.
Faster, more efficient subcontractor payments
Streamlining payments to subcontractors offers numerous advantages for payment sender and receiver. A general contractor can save time and energy on manual processes like tracking bills and sending payments by establishing an automated and pre-set payment process. Subcontractors can get more transparency for the flow of funds and faster payments overall. Both avoid all the hassles and costs involved in sending and receiving checks.
After the contractor has nailed down payment terms, Truss can help make subcontractor payments more efficient and predictable by making the process simpler and more automatic. Import bills and pay subs right in the platform, and they’ll be marked paid immediately. Subs choose which bank and account to deposit the funds and track funds as they move into their accounts.
Sign up for a free Truss account and start streamlining your subcontractor payments today.