Construction projects can range from modest $50,000 renovations to expansive $100 million developments, making the interaction between sales and credit teams critical. Each financial step has to be well considered, and it’s not unusual for the two departments to have a little friction.
While sales teams focus on securing contracts to drive revenue, credit professionals ensure these deals are financially sound and won’t expose the company to unnecessary risks, such as delayed payments or defaults.
However, working together is unavoidable and is absolutely critical for the entire company. Consistent project success requires sales and credit teams to align their goals and collaborate effectively for smoother processes and more profitable outcomes.
One of the most crucial periods of alignment is before a new customer is onboarded or a new project is started. Here are seven crucial points sales and credit teams should align on before finalizing and inking any construction contract.
Customer Creditworthiness Assessment
Securing a construction contract is just the beginning–the real challenge is ensuring clients meet their financial obligations.
A delayed payment could disrupt cash flow and hinder progress, creating a ripple effect not only on that specific contract. When sales and credit align regularly, reviewing customers through thorough creditworthiness assessments so teams can make confident decisions moving forward.
What to Discuss
- Financial Stability: Review the client’s financial statements, credit reports, and payment histories. A client with a history of late payments on a $500,000 project may require stricter credit terms.
- Industry Risks: Consider external factors like market downturns that could delay payments, particularly on large-scale projects.
- Credit Limit Recommendations: Propose credit limits based on the project’s value and the client’s risk profile, ensuring alignment with the company’s risk tolerance.
Action Steps for Efficiency
- Data Sharing: Sales provides initial client information, while credit conducts a thorough financial check. Implement regular meetings to discuss findings and ensure everyone is on the same page.
- Joint Evaluation: Schedule regular touchpoints to discuss risks and decide on a credit limit, ensuring both teams are aligned.
- Automated Alerts: Use software to set up automated alerts for client credit status changes, allowing for real-time adjustments.
Agreement on Payment Terms
Payment terms in construction contracts can make or break a project’s cash flow. For instance, offering Net 30 terms on a $1 million contract might be standard, but extending to Net 60 for a high-risk client could jeopardize the company’s financial stability.
Clear communication and team coordination allow for quick adjustments that meet company and client needs.
What to Discuss
- Standard Terms: Ensure payment terms like Net 30 or Net 60 align with industry norms and company policy.
- Customer-Specific Adjustments: Consider requiring a 20% upfront payment on a $500,000 contract or setting milestone-based payments for large projects.
- Incentives and Penalties: Discuss offering a 2% discount for early payment or charging a 1.5% monthly late fee.
Action Steps for Efficiency
- Drafting and Review: Credit drafts the payment terms, and both teams review them in a single, collaborative session to minimize back-and-forth.
- Digital Contract Management: Use digital tools to draft, review, and finalize payment terms, ensuring quick access and easy updates.
- Client Communication Strategy: Develop a unified approach for communicating terms to the client, ensuring transparency and minimizing delays in approval.
Risk Mitigation Strategies
Construction projects often involve significant financial risks, such as a $3 million project delayed due to unforeseen site conditions. By working closely together, sales and credit teams can quickly identify potential risks and implement effective mitigation strategies, ensuring projects stay on track.
What to Discuss
- Security Instruments: Implement measures like performance bonds or letters of credit for projects exceeding $1 million.
- Payment Structures: Require progress payments tied to specific milestones to maintain cash flow.
- Insurance: Consider credit insurance for projects with international clients or those valued above $2 million.
Action Steps for Efficiency
- Joint Risk Assessment: A joint risk assessment early in the project planning phase helps identify potential issues and develop mitigation strategies.
- Standardized Procedures: Develop standardized procedures for implementing security instruments and payment structures to speed up decision-making.
- Regular Check-Ins: Schedule regular check-ins between sales and credit to reassess risks and adjust strategies as needed.
Customer Account Setup
Efficient customer account setup is critical for managing billing processes, especially in multi-phase projects like a $10 million infrastructure build. Collaboration between teams ensures the setup is accurate and timely, preventing delays in invoicing and payments.
What to Discuss
- Essential Information: Confirm details such as billing addresses and contact persons. For example, knowing the right AP contact can save days in the event of a payment issue.
- Communication Channels: Decide on invoicing methods, such as sending monthly invoices via email or project management software.
- Compliance: Ensure all legal and regulatory compliance aspects are covered.
Action Steps for Efficiency
- Pre-Setup Checklist: Develop a checklist for sales before account setup, ensuring all necessary information is gathered upfront.
- Verification Process: Implement a quick verification process to ensure all data is correct before moving forward.
Credit Policy Alignment
In construction, where projects can vary greatly in size and scope, ensuring that every deal aligns with credit policies is essential for maintaining the company’s financial health. Regular discussions between sales and credit teams make decision-making faster and communication clearer when it comes to policy matters.
What to Discuss
- Policy Review: Reiterate standard credit policies, such as limiting credit exposure to 15% of annual revenue.
- Exceptions: Discuss any deviations, such as extending payment terms for a client with a $5 million contract.
- Approval Process: Outline the steps for authorizing exceptions, ensuring all stakeholders are on board.
Action Steps for Efficiency
- Policy Compliance Check: Regularly review credit policies together so both teams are well-versed and can quickly align during negotiations.
- Pre-Approval Templates: Develop templates for standard exceptions
- Centralized Documentation: Using a centralized system to document and track policy exceptions makes it easy for both teams to access and review.
Dispute Resolution Plan
Disputes in construction, such as those over a $500,000 change order, can delay payments and strain relationships. By establishing a clear dispute resolution plan, sales and credit teams can resolve issues quickly and maintain smooth operations.
What to Discuss
- Common Disputes: Identify potential issues, such as delayed payments or scope changes.
- Resolution Procedures: Agree on escalation paths, timelines, and responsibilities.
- Legal Considerations: Include arbitration clauses or other legal measures in the contract.
Action Steps for Efficiency
- Pre-Emptive Scenario Planning: Conduct pre-emptive scenario planning to identify and mitigate potential disputes before they arise.
- Streamlined Communication Protocols: Establish clear communication protocols, ensuring all relevant parties are informed and aligned when a disagreement occurs.
- Real-Time Monitoring: Flag potential issues early, allowing for proactive dispute management.
Final Review and Contract Approval
Before signing a $10 million construction contract, sales and credit teams must conduct a final review to ensure all terms align with the company’s policies and the project’s goals. Regular collaboration ensures this final step is thorough yet efficient, preventing last-minute delays.
What to Discuss
- Review of All Terms: Ensure payment terms, risk mitigation strategies, and dispute resolution plans align with company policies.
- Client Understanding: Confirm that the client fully understands and agrees to all terms.
- Approval Process: Outline steps for final approval from internal stakeholders and the client.
Action Steps for Efficiency
- Comprehensive Review: Conduct a joint, comprehensive review of the contract using a checklist to ensure all points have been covered.
- Digital Approval Workflow: Use a digital approval workflow to streamline the final sign-off process, reducing the time it takes to get all necessary approvals.
- Client Confirmation Call: Schedule a final call with the client to review key terms and confirm their understanding, ensuring no surprises post-signature.
Conclusion
When sales and credit teams collaborate regularly and communicate clearly, they can ensure that every contract meets revenue goals and protects the company’s financial health. This structured approach leads to more successful and profitable projects, providing long-term stability for both teams and the company.