Managing finances in the construction industry is complex, with long project timelines, high upfront costs, and delayed payments. One of the most critical aspects of financial management is construction accounts receivable (AR)—the money owed to a construction company for work completed or services rendered.
Without a solid AR process, even profitable projects can face cash flow issues, delaying payments to subcontractors, suppliers, and employees. In this comprehensive guide, we’ll explore construction accounts receivable, its role in financial stability, best practices for management, and how Planyard helps streamline the entire process.
What is Construction Accounts Receivable?
Accounts receivable (AR) refers to the outstanding invoices a construction company has sent to clients but has not yet been paid. It represents credit extended to clients and is recorded as a current asset on the company’s balance sheet until collected.
For example, when a contractor completes a phase of a project and invoices the client, that amount becomes accounts receivable until it is paid. The longer the delay in collection, the greater the risk to the company’s cash flow.
Why Construction Accounts Receivable is Different
Unlike many industries where invoices are paid within 30 days, construction payments often follow complex schedules tied to project milestones, retention amounts, and change orders. This leads to:
- Long payment cycles – Some invoices take 60+ days to clear.
- Cash retentions – Clients may hold back a portion (e.g., 5-10%) until project completion.
- Disputes & change orders – Payment delays often arise from disagreements over project scope or quality.
With these challenges, construction firms need a well-defined AR strategy to ensure they get paid on time while maintaining strong client relationships.
The Three Types of Accounts Receivable
- Trade Receivables – Money owed for completed construction services or materials provided.
- Retention Receivables – A percentage of payment withheld until project completion.
- Unbilled Receivables – Work completed but not yet invoiced, often due to contractual conditions.
Understanding these categories helps construction firms better track and forecast their cash flow.
Accounts Receivable vs. Accounts Payable
- Accounts Receivable (AR) – Money clients owe to your company for work performed.
- Accounts Payable (AP) – Money your company owes to suppliers, subcontractors, or vendors.
While AR represents incoming cash, AP represents outgoing payments. Proper management of both ensures smooth cash flow.
How to Record Construction Accounts Receivable
Construction AR is recorded in the company’s accounting system as a current asset until payment is received. The typical process includes:
- Invoice Creation – Generated after work is completed or based on contractual milestones.
- Recording in Accounting Software – The invoice is logged under AR.
- Follow-up & Collection – Tracking outstanding invoices and ensuring timely payments.
- Cash Application – Once payment is received, it is recorded as cash and AR is reduced.
GAAP Rules for Accounts Receivable
According to Generally Accepted Accounting Principles (GAAP), AR should be recorded when revenue is earned (accrual accounting), even if payment is not yet received. Additionally:
- AR must be classified as a current asset.
- Companies should estimate bad debt allowances for invoices unlikely to be collected.
- Revenue recognition must follow the percentage-of-completion or completed-contract method.
Challenges in Managing Construction Accounts Receivable
1. Long Payment Cycles
In construction, payments can take months due to milestone-based invoicing and client approvals.
Solution: Implement automated reminders and follow-ups to reduce payment delays.
2. Cash Retentions
Clients often hold 5-10% of the contract value until the project is fully completed.
Solution: Clearly outline retention terms in contracts and track retention receivables separately.
3. Disputes & Change Orders
Payment delays often result from disagreements over scope, contract terms, or quality.
Solution: Keep detailed documentation of work completed and use real-time cost tracking to prevent disputes. Learn why live cost tracking is essential for construction project success.
4. Lack of Payment Discipline
Some clients delay payments simply because they can.
Solution: Establish strict payment policies and enforce penalties for late payments.
Best Practices for Managing Construction AR
1. Clearly Define Payment Terms
Ensure all contracts outline:
- Payment schedules
- Retention terms
- Late payment penalties
- Accepted payment methods
Pro Tip: Require upfront deposits to improve cash flow.
2. Automate Invoicing and Follow-ups
Manual invoicing leads to delays and errors. Using construction accounting software like Planyard ensures:
- Construction invoice management to streamline everything, from invoice collection to budget updates, ensuring your financial operations are efficient and accurate.
- Automated reminders for overdue payments.
- Integration with Xero, MYOB, QuickBooks, Sage to eliminate manual entry
3. Track Accounts Receivable in Real-Time
Use real-time AR tracking to monitor outstanding invoices and forecast cash flow accurately.
4. Offer Multiple Payment Options
Make it easy for clients to pay by accepting:
- ACH transfers
- Credit cards
- Online payments
5. Enforce Late Payment Penalties
Charge interest or penalties on overdue invoices to encourage timely payments.
6. Regularly Review AR Aging Reports
An AR aging report categorizes invoices by age (e.g., 30, 60, 90+ days overdue). Reviewing this weekly helps identify high-risk clients and take proactive action.
How Planyard Streamlines Construction Accounts Receivable
Planyard simplifies AR management by automating invoicing, tracking payments, and providing real-time financial insights.
Key Features:
✔ Automated Invoice Collection – Send invoices directly from Planyard and track payment status.
✔ Real-Time AR Reports – View outstanding balances and overdue payments at a glance.
✔ Retention Tracking – Monitor held-back payments to ensure smooth collections.
✔ Seamless Accounting Integration – Syncs with QuickBooks, Xero, Sage and MYOB to eliminate double data entry.
✔ Standardized Approval Workflows – Ensure invoices match contracts and purchase orders before sending.
By eliminating manual processes and providing real-time insights, Planyard helps construction companies reduce payment delays and improve cash flow.
Construction accounts receivable management is crucial for maintaining a healthy cash flow and ensuring project success. By implementing clear payment terms, automating invoicing, tracking AR in real time, and using tools like Planyard, construction firms can reduce risks and get paid faster.
To take control of your construction AR and streamline your financial management, book a demo with Planyard or try 14 days for free.