Construction Accounts Payable: Tips, Best Practices, & More

What Is Construction Accounts Payable?

Accounts payable are amounts that a construction company owes to third parties such as suppliers, creditors, subcontractors, and other service providers. They include utility bills, monies owed for material supplies, subcontractor wages, etc.

Since accounts payable are settled within a year, they’re recorded on the balance sheet as short-term liabilities.

Accounts payable are typically settled in 15, 30, or 45 days (depending on the agreed-upon payment terms) after receiving the creditor's invoice. However, construction companies sometimes pay before the due date to take advantage of early-payment discounts.

Accounts receivable and payable are related, as construction companies only pay their bills using customer payments.

What Is the Role of Accounts Payable in Cash Flow Management?

Increasing accounts payable causes a corresponding uptick in cash flow. For example, buying materials on credit saves cash, which can be used to settle other needs and invest in growth opportunities.

For this reason, construction companies sometimes extend payment deadlines and buy on credit to save money. 

The only drawback is that it can strain vendor and subcontractor relationships and reduce the company’s creditworthiness.

A reduced accounts payable means the construction company is paying off its debts. While this increases creditworthiness, it strains cash flow, making it harder to settle other financial obligations.

To that end, construction companies use strategies to strike a delicate balance between settling debts, maintaining a positive cash flow, and maintaining positive relationships with partners. We’ll explore these strategies in the next section.

Strategies to optimize cash flow through AP practices

Here are the AP best practices construction companies use to optimize cash flow. 

• Schedule payments close to their due dates: To maintain a positive cash flow and liquidity, schedule payments just before the due date. This way, you’ll have sufficient cash to settle other operational expenses.

• Compare discounts against current financial obligations: Perform a cost-benefit analysis of settling debts and extending payment deadlines. Sometimes, the benefits of paying a debt late outweigh the early payment discount.

• Prioritize payments based on due dates and importance: Track the due dates of all payables and settle those that are due earlier. Also, settle invoices critical to the completion of each project first, before others. 

• Align payment schedules with internal cash flow forecasts: You want to settle your bills only when there’s sufficient cash available. And you wouldn’t want to pay all your debts at once and be left with no money to settle other obligations. That’s why it’s advisable to set your payment schedules to match when clients pay for services rendered.

To implement these strategies, you can use ServiceTitan’s tool suite, starting with the Accounts Payable software. This software helps you track, manage, and pay bills efficiently. 

Additionally, our integrated accounting features let you manage all accounts payable and other financial payments as a sub-ledger in ServiceTitan. This makes it easy to view all your account payables and receivables at the end of the month.

Even better, whenever you make a payment or edit a transaction record, our Touchless Integration (available only to QuickBooks Online and Intacct users) will automatically export the journal entries related to such transactions to your accounting software. 

This eliminates the tedious process of batching, posting, and exporting transactions to QuickBooks and provides accurate insight into your company’s financial health.

Companies that use this feature report a 95% reduction in the time it takes to export data and a 90% reduction in unique export errors for QBO.

For example, Jessica Woodruff Smith of AirWorks Solutions, whose former company used QuickBooks Desktop, says she always experienced export errors. 

Customer names were incorrect. Vendor names didn’t match. And document numbers failed to export.

Fortunately, with ServiceTitan, “I don't have errors to deal with, and all the information gets to my GL. My Profit and loss matches ServiceTitan to QuickBooks, and it's beautiful. I don't have to export batches anymore. It just shows up in QuickBooks.”

To simplify accounting processes even further, ServiceTitan’s transaction hub gives you a centralized view of all invoices, bank deposits, and payments on one screen. This way, you don’t need to switch between screens or platforms whenever you need to track transactions.

Speaking of the effectiveness of these features, ServiceTitan’s Product Manager Mike Songloke says:

Check out our webinar recaps on touchless accounting and transaction hub best practices to learn more about how ServiceTitan simplifies accounting.

How Can Automation Improve the Accounts Payable Process in Construction?

Reconciling accounts, preparing financial reports, and performing three-way matches can be a headache-inducing task for business owners and accountants.

These processes typically involve more than one tool, so the accountants who are in charge of the process need to do the following simultaneously:

• Switch between platforms or screens

• Perform complex calculations

• Copy and paste data multiple times

This manual process increases the margin for error and causes employees to spend more time than necessary on accounting tasks. By the time they’re done, they may not have enough time left for other core activities.

Rather than hiring more employees, the permanent solution to this problem is using automation in the accounting process. This way, employees won’t need to:

• Copy and paste data between platforms. Instead, automated workflows transfer data between your accounting system and the Enterprise Resource Planning (ERP) platform.

• Spend hours or even days manually reconciling accounting records. Instead, the automated system will compare the vendor statements to the accounting records and flag discrepancies.

• Manually reconcile documents. Instead, the system automatically compares the purchase order, the receiving document, and the vendor invoice, and then flags any discrepancies.

This reduces payment disputes and frees up more time for employees to focus on other value-added tasks. It also accelerates payments, allowing you to take advantage of early payment discounts.

Implementing accounts payable software in construction workflows

Automating manual tasks is important for construction efficiency. But, practically speaking, how do you do it? Accounts payable software is the perfect way.

For example, ServiceTitan’s Accounts Payable platform makes it easy to manage outgoing payments. It centralizes vendor invoices and bills and facilitates timely payments.

From the platform, you can create, view, and manage:

• Non-purchase order bills for non-job-related costs, such as insurance, permits, gas, marketing, etc.

• Non-return credits, which are not related to the return of a purchased material or inventory.

Adding non-purchase order bills and non-return credits to jobs makes it easier to predict each project's profitability accurately.

ServiceTitan’s Accounts Payable platform also allows you to create templates to automatically settle non-PO bills at preset intervals—daily, weekly, or monthly. 

This relieves the stress of manually creating a bill for the same item whenever you need to pay for recurring utilities like electricity and subscriptions.

Furthermore, the platform lets you:

• Track bills by status (unreconciled, discrepancies identified, and reconciled).

• Reconciled or unreconciled bills and statements—individually or in bulk.

• Approve and pay bills and statements—individually or in bulk.

• Add bills to your financial statements—individually or in bulk.

• Track and create payments for bills and statements—individually or in bulk.

This makes keeping tabs on your payments much simpler, so you don’t get hit with late penalty fees. Plus, you can space out your payments instead of paying everything at once and messing up your cash flow.

What Are the Best Practices for Managing Construction Accounts Payable?

Software and automation are great. But they can't replace the fundamentals of managing accounts payable—regular reviews, verifying invoices, and maintaining clear records still matter.

To that end, here are some best practices for managing construction accounts payable:

Establish payment terms and schedules

Before locking in a contract with vendors, ensure the payment terms are very clear.

• When will late fees kick in?

• What details should be included in invoices? 

• What are the payment methods (e.g., ACH or credit card) and schedules (e.g., net 30 or 60)?

• Will it be a lump sum or installments?

For maximum transparency, clearly define the process for resolving payment disputes.

Lastly, pick one or two days weekly or monthly to settle due invoices. For example, it could be once every week or the second week of each month.

Regardless of the schedule you choose, prioritize key utility payments such as water and power to prevent service disruptions and maintain a great reputation with utility providers.

Regularly review and reconcile accounts

Account reconciliation involves ensuring that your internal records of amounts owed to vendors match their invoices and statements. This is done to prevent errors, detect fraud (vendors can send the same invoice twice), and ensure accuracy.

For your records to always be accurate, regularly perform account reconciliations and reviews using this checklist:

• Collect the relevant documents—Invoices, receiving reports, purchase orders, and payment records.

• Audit vendor invoices—Check the name, invoice number, and payment amounts.

• Match all statements to your records—Ensure you’ve paid the right amounts.

• Confirm that credit notes have been applied to the appropriate invoices and recorded properly.

• Perform three-way matching—Confirm that the details captured on the purchase order, vendor invoice, and receiving document align.

• Reach out to vendors to resolve discrepancies.

• Document the reconciliation process for future reference.

Utilize project tracking for financial oversight

Another fundamental principle is tracking each project’s cost. This way, you can settle invoices before they go past their due dates and disrupt the project.

How can you track project costs?

The traditional method involves dividing project costs into categories and entering them into spreadsheets after every workday. 

However, manual data entry is prone to errors and takes a lot of time, which could be better used for more productive tasks.

The better alternative is using ServiceTitan’s Project Portfolio feature, which gives a high-level overview of all active projects. The feature also lets you group related projects based on their status, customer, or project manager.

Jade Vasun, Senior Product Manager at ServiceTitan, gave a succinct explanation of the feature’s capabilities at one of our webinars:

From the Project Portfolio, you can access each project’s budget versus the actual table, which compares the budgeted amount for each line item with the actual amount spent.

If you click the dollar sign or quantity related to each line item, you can view the expense item’s source, such as the vendor or purchase order associated with the material.

This makes it easier to track your costs and identify payables that must be settled urgently.

Jonathan Beyer of the Beyer Boys—a Texas-based air conditioning and heating company—credits the Project Portfolio feature with helping the company manage its construction projects.

What Challenges Arise in the Accounts Payable Process?

Like most accounting processes, accounts payable is riddled with landmines that can damage your bottom line. 

The first step to avoiding them is knowing where the landmines are located.  Let’s explore the common accounts payable-related challenges you’re bound to encounter and offer some solutions.

Common issues in manual accounts payable workflows

Construction companies typically use two methods to manage their accounts payable:

• Manual methods such as spreadsheets, PDF templates, email chains, etc.

• Automated systems such as Accounts Payable software.

Manual methods are sometimes preferred. We get it—they’re free and relatively easy to set up. 

However, as your company grows, manual methods become that anchor holding you back, as they’re not scalable. Plus, they introduce issues such as:

• Data-entry errors: Nothing good comes from manually recording transactions. The potential for error increases, you spend more time than necessary, and you risk overpaying or underpaying vendors.

• Approval bottlenecks: Slow approval processes can delay the settlement of vendor invoices, straining your relationship with suppliers.

• Poor visibility: Manual processes split accounts payable-related data into disconnected silos. This makes it harder to view real-time invoice statuses, payment schedules, and cash flow.

• Context-switching: Accountants must switch between multiple platforms to export, sort, and approve files.

How can you overcome these challenges? Enter automation.

Solutions through accounting software and automation

Accounting platforms automate repetitive tasks and eliminate manual data entry, lowering the potential for error and freeing up employees’ time.

However, there’s a caveat: not all accounting platforms fully resolve the issues posed by manual processes.

Standalone accounting platforms, like QuickBooks and Intacct, are simply data entry platforms isolated from the rest of your business. 

This means field technicians must manually input transaction data after each job. 

As a result, there’s a time lag between when a transaction happens on the field, when the front office can view it, and when it’s added to your current financials. This lag time can cause losses and accounting errors.

Beyond that, standalone accounting platforms don’t offer a consolidated view of your invoices and job cost data. 

So, to view the profitability of each project, you have to switch between screens and calculate your job costs.

To top it all off, because of the time involved in manually entering data and switching between screens, you’ll need to hire more employees as your business scales.

ServiceTitan’s Accounting For the Front Office feature completely solves this issue by integrating with other field service management tools. It lets you track invoices and payments and streamline financial workflows in one place.

With the software, field technicians can issue invoices. Once the invoice is paid, the cloud-based system automatically transmits it to the front office.

This means that back-office staff will immediately be able to access all outstanding invoices and balances in real-time. They no longer have to wait for technicians to return to the office with invoices or manually enter figures into accounting systems.

Additionally, the platform offers other features that automate various accounting tasks. These include:

• Invoice review—You can track the review of invoices using three key statuses: needs review, on hold, and reviewed. Additionally, you can assign invoice review tasks to specific team members, who automatically receive a notification. This way, invoices don’t get lost in the shuffle or chaotic email chains.

• Job Costing—From the invoicing page, you can access a summary of all you’ve spent on a project. Even better, all line items are automatically calculated and updated whenever a transaction happens in the field. 

• Batching and exporting—ServiceTitan groups transactions into batches every two minutes based on their type and date and lets you export them in bulk to accounting platforms like QuickBooks and Intacct. This makes it easier to find specific transactions and saves employees the hassle of spending hours and days to manually batch transactions. Additionally, it gives you an up-to-date overview of your financial health.

This streamlines the process of tracking and settling accounts payables, avoiding the errors and hassle associated with manual processes.

How Can Construction Companies Streamline Their Accounts Payable Workflows?

Accounts payable workflows typically begin when a construction company requires a vendor's services. To maximize efficiency, it's best to streamline every step of the process.

Here's how to do it.

Integrate purchase order systems with AP processes

A large portion of accounts payables arise from transactions with suppliers and vendors. This is because a large portion of project costs involves buying materials, which necessitates the creation of purchase orders (POs).

Therefore, it’s advisable to integrate your purchase order and AP systems. By doing so, you’ll experience the following benefits:

• Automatic three-way matching between the PO, the receiving report (confirming delivery), and the vendor invoice. This ensures you pay only for goods that were delivered.

• Reduced manual data entry since data from the PO will automatically reflect in the AP system. This saves time and minimizes errors.

• Shorter payment cycles since the three-way matching process is automated.

Standardize the process

To shorten invoice processing times and pay vendors quickly, create consistent procedures for approving, processing, and reconciling invoices. Capture these procedures in an SOP document, which should also cover:

• Who handles each task.

• Documentation required at each stage.

• Steps to take when there are discrepancies.

Implement strategies to reduce AP fraud

AP frauds are schemes opportunistic individuals use to steal from your business using the accounts payable process. They are carried out by employees, vendors, or cybercriminals.

AP frauds are common in the construction industry.

According to a survey by the ACFE (Association of Certified Fraud Examiners), 38% of construction fraud incidents involve billings. And in such incidents, construction companies reportedly lose an average of $250,000 per fraud incident.

So how can you prevent them? 

• Assign each step of the three-way matching process (approval, reconciliation, and payment processing) to separate people.

• Regularly reconcile and audit your accounts.

• Always verify changes in vendor information before approving payments. It’s advisable to call to confirm instead of using email.

• Use Benford’s law (the leading digits in numerical data sets are more likely to be small than large) to spot fraud attempts.

• Train employees to recognize accounts payable fraud.

• Use tools to automate your reconciliation process and spot fraudulent activities.

What Features Should You Look for in Construction Accounts Payable Software?

We’ve explained the advantages of using AP software instead of manual systems like spreadsheets.

However, in your search for AP software, you’re bound to come across various available tools with many different, potentially confusing features and options. 

So, here are the top features every AP software should have:

• Invoice capture and processing: You’ll need this to capture invoices electronically and automatically compare them with purchase orders and receiving documents.

• Approval and verification workflows: This helps higher-ups and assigned staff cross-check and sign off on invoices to fast-track payments.

• Real-time reporting: You want to access a centralized view of all your accounts payable to date. The platform should also provide reports for tracking key performance indicators (KPIs) and metrics.

• Payment execution: Ensure the tool supports payment scheduling—automatically paying vendors at preset dates.

• Integrations: At the very least, it should integrate with the three key accounting platforms (QuickBooks, Xero, and Sage Intacct).

To be clear, these features are required for a tool to perform the basic AP processes. 

However, to automate the entire process, it’s advisable to invest in a tool like ServiceTitan that helps automate other core AP-related processes, such as:

• Invoicing

• Inventory management

• Material procurement

• Job costing

• Field service management

• Project tracking

• Change order management

• Progress billing

Evaluate ServiceTitan as a Comprehensive Solution

Effectively managing your accounts payable leads to improved cash flow, reduced payment errors, and stronger vendor relationships. But, these benefits are contingent upon automating the process.

As we pointed out earlier, standalone platforms have their limitations and still require some form of manual data entry.

Fortunately, ServiceTitan breaks the mold by providing a platform that integrates with tools connected to AP-related business tasks. This helps fully streamline the accounts payable process from start to finish.

Additionally, the ServiceTitan features and tools we’ve explored above are just scratching the surface. We also have tools for materials tracking, field service accounting, inventory management, etc.

Book a demo today to find out ways ServiceTitan helps construction companies like yours streamline their entire operation.

ServiceTitan is a comprehensive construction software solution built specifically to help service companies streamline their operations, boost revenue, and achieve growth. Our award-winning, cloud-based platform is trusted by more than 100,000+ contractors across the country.