BILLING VELOCITY FOR CONSTRUCTION CONTRACTORS — DAYS FROM WORK PERFORMED TO CASH RECEIVED.
Billing velocity is the total time from when work is performed to when the corresponding cash arrives. On a project where work is performed 15 days before the billing cut-off, submitted at cut-off, approved in 12 days, and paid 30 days after approval, the cycle is 57 days. Every day of unnecessary lag in that cycle is a day of LOC utilization that has an interest cost and reduces availability for new mobilizations. The contractors who manage billing velocity intentionally have materially lower LOC utilization and interest expense than the ones who bill whenever it is convenient.
SPM tracks billing velocity by project and by GC as part of the weekly AR review. Velocity improvement is the first cash flow lever in every engagement.
THE SPEED AT WHICH EARNED REVENUE CONVERTS TO COLLECTED CASH — AND WHY IT VARIES.
Days from Work Performed to Cash Received
Billing velocity is the total cycle time from when work is performed to when cash is received. It has three components: billing lag (days from cut-off to pay app submission), approval lag (days from submission to GC approval), and payment lag (days from approval to payment). On a 30-day payment contract, a contractor who submits on the cut-off date, receives approval in 10 days, and is paid on the 30th day from approval has a billing velocity of 40 days from the billing cut-off. Add the 15 days the work was performed before the cut-off and the total cycle from work performed to cash received is 55 days. That 55-day cycle must be funded by working capital.
The Three Gaps That Slow Cash Collection
Billing lag: pay apps submitted after the GC cut-off date delay the entire cycle by one full billing period. A cut-off missed by 10 days delays the cash by 30+ days. Approval lag: GCs who take 14–21 days to process a pay app add that time to the cycle. Some GC contracts specify approval timing. When they do not, aggressive follow-up at day 10 from submission typically accelerates approval. Payment lag: payment terms of net 30 are standard. Net 45 and net 60 are common on owner-controlled insurance programs and public work. When payment lag is longer than standard, the billing cycle extension is a cost that should be built into the bid as a financing cost.
Time and Materials Invoicing Has Different Velocity Drivers
For T&M work, billing velocity depends on how quickly the work is documented and invoiced. T&M work that is completed in week one but not invoiced until the end of the month has a 3–4 week billing lag before the collection cycle even starts. T&M invoice discipline — submit within 48 hours of each T&M ticket or weekly for ongoing T&M work — dramatically shortens the cycle compared to monthly T&M invoicing.
FOUR SPECIFIC ACTIONS THAT ACCELERATE CASH COLLECTION.
The dollar value of velocity improvement: A $5M revenue contractor who reduces average billing velocity from 65 days to 45 days permanently reduces average outstanding AR by $274,000. That reduction eliminates $274,000 in LOC utilization, saving $19,000–27,000 annually in interest expense. No new revenue. No new contracts. Just faster billing and collections on the same work.
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