Over the last decade, we’ve worked with tens of thousands of subcontractors to process billions of dollars in invoices. It’s fair to say we know a few things about construction invoicing.
When we talk to trade contractors, one recurring theme is the challenge of construction invoicing. In this article, I want to focus on three critical areas that often present the most significant hurdles and give you some tools and tips for solving them.
- Inaccurate invoices and failure to meet contractual requirements
- Lack of tracking and overall organization
- Managing change orders and their impact on contract value
By having a plan in place for these areas, subcontractors can eliminate the headaches and hassles that lead to wasted time and lost profits.
Inaccurate invoices & failure to meet contractual requirements
The problem
Inaccurate invoices and incomplete documentation is one of the most common issues subcontractors face with invoicing. Mistakes like charging for the wrong work, missing documentation purchase orders or time sheets, and pricing that’s different from the contract make you look bad and cause payment delays. When you’re the one financing the cost of the project, getting a late payment because of a preventable paperwork error just can’t happen.
Staying compliant with the specific terms and conditions of contracts, such as including detailed and documented descriptions of work performed is another major hurdle. It makes sense; construction projects have a lot of moving parts and tracking everything that happens on a job is tough without specialized software.
Why it’s a problem
When invoices and supporting documentation are incomplete or incorrect, it not only slows down the payment process but can also damage the relationship between subcontractors and general contractors. Non-compliance with contractual requirements can lead to rejected invoices and strained communications, not to mention the threat of legal issues, further delaying payments and impacting your cash flow.
Possible solutions
To prevent these issues, subcontractors should:
- Standardize your invoicing process: Creating invoicing templates and a checklist to verify that all necessary information is included can significantly reduce errors.
- Training and education: Make sure your team gets the importance of keeping accurate records, whether that’s office staff calling in material purchases or field staff documenting project progress. When in doubt, regular training sessions can help keep everyone up-to-date with best practices.
- Regular audits: Periodically review invoices and related documentation to catch errors before they become issues. This proactive approach can prevent delays and disputes.
Using construction invoicing software can remove almost all of the manual work and potential for human error that comes with pen-and-paper invoicing. For example, Knowify tracks your contract terms, work performed, and project costs, so it can auto-populate all the invoice details for you and tell you exactly when to send your next invoice.
Expert insights
“With Knowify, I can make sure that when my guys clock in the field they are where they say that they are. So I can feel good about billing our clients for the hours that are being recorded. You know, having a catalog of different building materials or different rates for if someone wants to call me and say, Hey, I need to have 12 square [feet] of siding put up, I can just go and pull that item from my catalog and shoot out an invoice in a matter of 20 minutes.” – Mack Chrisman, 1st Choice Services
Tracking, documentation, and overall organization
The problem
Keeping track of all unpaid invoices, received payments, and relevant documentation can be overwhelming, especially for subcontractors juggling multiple projects. Disorganized records can cause you to send out invoices later than you should, fail to notice overdue or unpaid invoices, and generally have a hard time resolving payment disputes.
Why it’s a problem
Disorganization not only slows down your invoicing process but it hurts the profitability of the business. Time spent looking for documents or fixing mistakes is time that could be spent on revenue-generating activities.
Additionally, many of the issues caused by disorganization (late invoices, overdue invoices, etc.) can lead to cash flow problems. You don’t want to find yourself in a situation where you don’t have enough cash on hand to finish your current project or take on more work.
Possible solutions
To tackle this challenge, subcontractors should:
- Set regular review times: Dedicate specific times each week to review all pending, open, and overdue invoices. Take action on each invoice as needed. This habit can prevent a backlog and generally help you stay current on all things invoicing.
- Centralize documentation: Keep all project documents, including invoicing records, in one place, whether it’s cloud storage or a physical file cabinet if you’re more traditional. Software like Knowify and QuickBooks make this dead-simple.
- Develop a filing system: Create a consistent method for organizing and labeling documents. Whether you use project numbers, dates, or client names, a standardized system can save time when you’re searching for a document.
If you want something less manual, construction management software like Knowify can help you track and take action on invoices for a single project, or your entire business, from a single screen. Easily send invoices to clients, send reminders for unpaid invoices, and easily see important metrics like the outstanding accounts receivable (AR) for your entire business.
Expert insights
“Knowify is the main reason we’ve grown so much in the last few years. As the owner of the company – it easily saves me 20-40 hours a week vs what I was doing on paper before.” Nathan Kohatsu, UK Electric
Managing change orders
The problem
Change orders are a fact of life for subcontractors. No project goes exactly according to plan. And because each change order impacts the contract value of your project, they need to be accounted for precisely.
Every change in the project scope, adjustment in the project timeline, or unforeseen issue needs to be accurately documented, approved by the project owner, and reflected in invoices. This makes change orders one of the biggest headaches subcontractors face when they’re invoicing their projects.
Why it’s a problem
Change orders complicate the invoicing process. If not managed properly, they can result in underbilling or overbilling during and at the end of the project. Neither outcome is positive and both can harm the subcontractor’s relationship with the general contractor.
Similarly, underbilling can make a profitable project unprofitable, which is never good for business. Last of all, disputes over change orders can delay payments, affecting cash flow and your ability to operate.
Solutions
Effective management of change orders requires:
- Clear communication: Establish a process for discussing and approving change orders with all parties involved before any additional work begins. Clear agreements can prevent disputes later.
- Detailed documentation: Keep thorough records of all change orders, including the reasons for the changes, the costs involved, and the approvals. This documentation should be easily accessible and included with the invoice.
- Prompt invoicing: Bill for change orders as soon as they occur rather than waiting until the end of the project. This ensures that the costs are fresh in everyone’s mind and can expedite payment.
Construction management software like Knowify can help you create, send for approval, collect revisions, and manage your overall change order process. Similarly, Knowify can help you slot change orders into your project’s invoicing schedule seamlessly by auto-populating invoices with the change order details. This allows you to promptly invoice for the new work you’re doing.
Expert insights
“With change orders, there are two words to keep in mind no matter what, and that is notice and documentation. Your contract usually is going to require you, depending on how large the job is, it’s going to require you to provide some sort of notice.
Even if your contract doesn’t require that, it’s always better to give the other party, whether it’s a GC, an owner, a homeowner, whoever. If you feel like you’re encountering something that entitles you to more than the contract price, give them a heads up, give them written notice if it’s required. But that’s one way to make sure that you’re preserving your rights and maintaining the relationship.
The other part is documentation. If things are going to become a dispute and you’re going to need to prevail on that dispute, and I have to go fight for you, we’re going to win if we’ve got the better documentation. If it’s a larger job, you need to get the RFI submitted as soon as you encounter something that you think is different, whether it’s unforeseen condition, or specs and plans that that show a clash.
If you’re doing work in the ducts and your mechanical system is clashing with your electrical system, send the RFI as soon as you can and then take pictures. Photographs are a huge way of documenting what’s going on at the site. And if I am representing you and we have to, we have to litigate or or go to mediation, then the more of that kind of stuff that I’ve got, the better off we are.
A lot of the times you’re gonna need that stuff to prevail if you have to fight it out. But the key thing to keep in mind is that the better you are able to put that stuff together at the beginning, the less likely you’re gonna have to fight about it because the other side knows that your claim is valid.” – Kirk McCormick, Chair of the Construction Law Group at Ruberto, Israel & Weiner
Solve invoicing issues with construction management software
By addressing these common challenges head on through a combination of process changes, new tools, and additional training, subcontractors can get proactive about solving and prevent the invoicing issues that can sink a project.
As we’ve hinted at throughout the article, construction management software like Knowify can help automate and manage all aspects of your construction invoicing process. Whether you want help managing invoices across your company, or just want to simplify making and sending invoices, we’ve got you covered.
Reach out to our team to learn more about how Knowify helps subcontractors save time and money, get more organized, and be more profitable.