A contractor may have a reputation for completing large, complex projects on time and on budget. But maintaining long-term financial success requires more than skilled crews and sound construction management. It also depends on stable and predictable cash flow.
Staying financially agile has become more difficult in today’s unpredictable environment. Rising material costs, supply chain volatility and economic uncertainty are forcing contractors to be strategic about when and how they make and receive payments. Those who keep their money longer, while meeting their financial obligations to suppliers, have a clear advantage.
Doing so requires a combination of negotiation, technology and strategic financial planning. Contractors who master this balancing act are better positioned not only to maintain adequate liquidity, but also to unlock opportunities to invest cash before it leaves their accounts.
Let’s look at some ways to do both.
Improve payment conditions. One of the easiest ways to increase cash flow is by negotiating better payment terms. Historically, this has been achieved by working with suppliers and subcontractors who agree to extend due dates in exchange for long-term contracts or other benefits. (Conversely, some offer discounts for early payment, which can benefit both parties in some circumstances.)
If the goal is to increase DPO (Days Payable Outstanding), there are other tools that contractors should now consider.
Expansion of payment options. What matters is not only WHEN a bill is paid, but HOW it is paid. Contractors who still use paper checks to settle invoices are paying a premium while creating avoidable bottlenecks in cash flow. Digital payment methods can reduce processing costs, improve cash flow and strengthen relationships with suppliers by offering faster and more reliable payments.
Replacing checks with single-use virtual cards, for example, allows contractors to control the timing of cash outflows. Beneficiaries receive funds immediately, while the payer has until the due date to settle the card bill, providing additional days of float before funds are withdrawn from their account. Paying with a card, whether digital or plastic, offers another advantage. Contractors can also earn a revenue share with each payment, turning payments into a new source of income.
Another alternative, ACH (Automated Clearing House), allows you to schedule payments at the last possible moment while meeting contractual obligations. For contractors, these electronic funds transfers are faster, cheaper and easier to track than paper checks, helping to improve cash flow and reduce administration time. For affiliates and suppliers, ACH means faster and more reliable payments made directly to their accounts, with less risk of delays or fraud.
Integration of the payment process in the accounting systems. Instead of relying on a stand-alone accounts payable function, many contractors now integrate payment processing directly into their accounting systems. By automating payments and integrating them with existing accounting systems, contractors can reduce errors, eliminate late fees and ensure payments are made at the most advantageous times.
Digitizing incoming invoices and integrating them into the accounting workflow also reduces the use of paper, postage and labor, reducing AP processing costs compared to manual paper-based systems. In addition, using a payment hub also makes it easy for contractors and suppliers to pay using their preferred payment method (virtual card, ACH, check or wire) while mitigating the risks associated with manual data entry and the transfer of sensitive payment information between disconnected systems.
Shortening the collection time. Automation can also play a crucial role in expediting accounts receivable. It can be especially useful on large commercial and public projects, where payment terms often stretch 90 days or more due to approval chains, lien waivers, and funding cycles. That’s double the 45 DSOs (Days Sales Outstanding) that construction cost accountants typically cite as the threshold for maintaining healthy cash flow and credit management.
Digital invoicing platforms reduce the risk of human error and ensure invoices are sent quickly, with built-in reminders for late paying customers. Automated payment gateways allow customers to make payments online, eliminating delays caused by mailed checks or manual processing.
In addition, with the help of AI tools, it is possible to gain insights into everything from payer performance to credit risk management, as well as predictive analysis of payment projections and collection forecasting. All can contribute to a builder’s ability to understand cash flow risks and plan future business expenses accordingly.
Payment outsourcing. Managing payments internally can be time-consuming and expensive, especially for larger contractors with high transaction volumes. Outsourcing the actual payment process to a trusted source can reduce administrative overhead and improve efficiency.
At Commerce Bank, for example, contractors simply submit a payment data file specifying each vendor’s preferred payment method. The bank handles the rest – managing disbursements while minimizing exposure to fraud, compliance monitoring and detailed analytics that help contractors refine their cash flow strategies. This allows builders to scale their operations using their existing AP staff, who can now focus on higher value strategic tasks.
Make idle cash work. Keeping money in the bank isn’t just about delaying payments. It’s about putting that cash to work before it has to be disbursed. Contractors with strong cash reserves can invest short-term funds in interest-bearing accounts or low-risk financial instruments to generate returns on idle cash.
Some contractors take an even more proactive approach by using excess cash for strategic reinvestment. Buying materials in bulk during price drops, closing favorable contracts with suppliers or taking advantage of discounts for early payment can generate financial benefits that exceed the interest earned on deposits. The key is to balance liquidity with opportunity, ensuring that cash remains accessible while still putting to work.
A cash flow strategy for long-term success. Contractors who take a proactive approach to cash flow management will be in a stronger position to weather economic uncertainties and maintain financial stability. In an industry where cash is king, those who manage it wisely will have the power to grow, invest and stay ahead.
Regardless of the challenges your company faces, and the questions that come with them, you don’t have to face them alone. At Commerce Bank, we’ve been helping businesses of all sizes find the solutions they need since 1865. Because nothing matters more to us than your success. More information at commercebank.com/SolutionsThatMatter.
CommercePayments® solutions are provided by Commerce Bank.
