How to Master Construction Payment Terms

Hey, Construction Legends. So in this video or podcast, we are going to show you exactly what you need to negotiate into your contract with regards to payment terms. So everything, all the problems that you're trying to solve, any tricky little things that are in there, and what you're trying to achieve by negotiating that payment term as part of your contract. Now, there is a slide deck that goes along with it. So if you're listening to this on podcast, it might be better to jump over to our YouTube channel and check it out there so you can see the exact slides where we're going through everything. And hi, my name is Cian Dillon Brennan. I am the CEO of Quantum Contract Solutions. The reason we make these videos is because so many construction companies out there, they're losing money handover fees. In this particular one, you can end up having 40 or 50-day payment terms and you don't even realize. So hopefully it's going to be valuable to you. And please like and subscribe and I'll chat to you soon. Let's go. How's it going? So in this video, we're going to talk about payment terms and how we negotiate payment terms into the contract and what problems are we trying to solve and why it's important. Okay, so let's quickly talk about one of the key concepts in the construction business. When you're a contractor, cash flow is king, right? Now, so I've probably been through 3 issues recently where We've had clients come to us and they're in a big dispute and there's a payment dispute and they're completely in the right. And so there's a couple of different levers that their clients use to squeeze an ex. And this happens all the time. One of them really is squeezing cash flow, that the contractors typically are, are so desperate for money way less than they should agree to. Okay, this all of the time on major construction contracts. They're like, you guys are late, we're going to offset it against your final, um, your payments, and we're not— we're only going to give you half. Then you have to argue, but you need all the money, so you agree to something you really don't want to agree to. So for construction companies, having cash flow is— having a healthy cash flow on project is absolute king, right? If you cannot be squeezed by the client. If you're actually fine, you can wait it out, you can get paid the whole amount and some because you can impact them with interest on late payments, which we'll talk about now. So I need you to understand that the concept of how can we increase a client's cash flow by negotiating better things into the contract. And this particular clause here around payment terms is one of them. And there's a few little tricky things where you can get caught out. And let's look into it now, okay? So cash flow is king, remember that. The reason we're trying to do this is we want to increase their cash flow, okay? So let's talk about the payment process on a construction project. Now, more often than not, it's not as simple as submitting an invoice and getting paid. Stuff can happen where the contract says, I haven't explained this process yet, but the contract says follow this process as it more often than not likely will, and you just submit an invoice 'cause you've no idea about contracts, and they sometimes just pay against that invoice because they also, sometimes they just do it, right? That can actually turn around and bite you when you do submit an invoice and then they don't pay. And then you're like, "Why you haven't paid me?" Like, "Oh, you didn't follow the process." And it's like, "Well, I never followed the process." This happens. This sort of thing happens. We don't want it to happen to our clients. So actually following the procedure in the contract is what you need to do, right? So let me explain how it works, right? There's a difference between a payment application and an invoice. They're not the same things. A payment application is, here's what we are going to claim. We're not— this isn't what we're claiming. This is what we're going to claim. What do you think? Is it reasonable? Is it okay? Right. So they submit the payment claim and the client reviews it. Yeah, it's reasonable. And they issue a payment certificate, which says, here's a payment certificate for all, like, you know, the value that you're claiming. And then you submit an invoice against that payment certificate. And then the payment terms start. Okay, you submit your invoice and then it's 30 calendar days or 20 business days from that point, and then you get paid. Now, what we need to— this is kind of what is standard, is this process. We've got to submit a payment application, receive the payment certificate, and, um, submit the invoice against it, and then we got 30 calendar days or 20 business days and then get paid. Now, the first thing is for the client above you to give you longer payment terms. You know, instead of having to pay you every 30 days, they'll pay every 45 days. That's better for their cash flow. Awful for your cash flow, but better for their cash flow because less money is going out, right, in that cycle, and you have a better cash flow. So that's not what we want, right? We want to make sure that at a minimum, our clients are 30 calendar days, 20 business days. Right from that point. However, things can get a little bit tricky in the contract and that's where we need to look in and we need to read the clause, right? How many days is in this section here between submitting the payment application, receiving the payment certificate, and then submitting the invoice against the payment certificate, right? This section here is actually, is it up to our client to do it? So hopefully that we don't need to really worry about that, but from submitting a payment application then to receiving the payments, how long are you giving them to review it, right? What happens if it's 20 days? Now you add 20 days to this whole process and you're at 50 days potentially, right? So we're looking at the whole length of the process. That's what we need to work on and where we can actually make a real big difference. One, we got to make sure that this is 30 calendar business days, no moving, right? Here we can reduce some stuff as well. Hey, you need to move this a bit quicker, 21 days. Mate, right? It needs to be done in 7 days. We need to get paid. Then we're going to submit the invoice directly against it. That's a way that you could reduce it by 7 days. Okay, so that's, that's what I'll say. It will be from end of month, the 30 business days, or the, sorry, the 30 calendar days or 20 business days will start. So on the 28th of every month, they want you to submit their payment application. Great. They're going to take 10 days to review it, right? So on the 8th, make the maths easy a bit, on the 8th of the next month you received a payment slip. That day, on the 8th or the 9th, the next day you submit your invoice on the 9th. Then the term in the contract says at the end of month your 30 calendar days will start. So you've got to wait from the 9th all the way to the end of the month. So what are we talking, 20 days? 20 days, and then your 30 days start. That's 50 days. Just sneak a little way to build up the time. That's not what we want to happen. We wanna make sure that it's immediately 30 days start from when you submit your invoice, right? So the key takeaway here is figuring out how long is the whole process. You might think I only have 30 calendar days in my contract. That could be okay, but actually be 50, and you're like, oh, you know, and then your cash flow gets hit. That's not what we want to happen. Now, What problems are we trying to solve here? We don't want our clients to sign up for long or excessive payment terms. Longer payment terms means lower cash flow for them. And because they have lower cash flow, they're going to have higher finance costs. Lower cash flow, it's harder to pay their staff and their equipment because there's not enough money coming in. So they need to get a bank overdraft or loan, which is going to cost them money. And then have to pay the interest on that loan to get it all to work because they've had to finance to make sure that they can meet that loan in terms. That's not what we want, right? Because that costs them money. So we can save them money by not having to finance things. And the second thing is we can increase their cash flow. So they're going to be more solvent and in a far better, you know, in a far better position commercially. That's what we want. Okay. Now, what are we going to do about it? Remember, cash flow is king. So we want to do that. We want to calculate the full payment cycle. We want to reduce our payment terms from the very start of the process all the way to the very end of the process as much as we can. No more than 20 business days or 30 calendar days from the invoice. And we've got to remember that we want to apply interest onto late payments. There's a clause for that. We're going to make sure that we're applying interest onto late payments because if you don't pay us, we want the money to be totalling up so we can use that as leverage. Hey, you haven't paid us in, you know, a month. Just reminding you there's interest on late payment of 10%, so it's gone up by X amount. Gives them a bit of urgency to get to pay you quicker. Hopefully this has been useful. As usual, any questions, pop it in the Slack. Remember to record your video explaining it back to us so we know that you understand, and then we'll go from there. Take it easy, bye.