Maintaining strong customer relationships is critical in construction, especially when handling payment extension requests from long-standing clients. Material suppliers and subcontractors often find themselves balancing delayed payments with the need to keep projects moving. Offering flexibility can help nurture and preserve these important relationships.
However, there’s a fine line between accommodating a customer’s needs and exposing your company to financial risk. The average days sales outstanding (DSO) in construction is 94 days , meaning suppliers are already working within long payment cycles, making careful management of extension requests crucial.
To effectively manage payment extension requests, it’s necessary to evaluate whether the request is justified, implement flexible terms that protect both parties, and recognize moments when tighter controls are required. Balancing these steps ensures your company remains financially stable while supporting customer relationships.
Evaluating Payment Extension Requests
Payment delays are common in construction, so extension requests are not uncommon. Yet, requests must be treated on a case-to-case basis. Careful consideration of the customer’s background and circumstances will provide clarity on how to move forward.
Consider the Customer’s History
When a customer asks for a payment extension, the first place to start is with their payment history.
Payment records are especially important for material suppliers since the industry already faces significant payment delays. Suppliers often wait months to be paid due to complex projects, and adding additional delays through extensions will further strain cash flow.
- Why This Matters: Evaluating the customer’s history provides crucial insight into how they manage credit. If a customer has consistently met net60 terms in the past but suddenly requests an extension, it could indicate cash flow issues or external delays in project funding. Monitoring and tracking this history within your system helps you make informed decisions.
Understand the Reason for the Request
The construction industry is notorious for payment delays caused by external factors like project financing or slow general contractor payments. Nearly 40% of businesses experience payment delays of 60-90 days, and it’s often linked to financing challenges. Material suppliers are frequently at the mercy of these delays, so understanding the reason behind the extension request is critical.
- Ask Directly: Knowing whether a payment delay is tied to a specific project delay or an underlying financial issue helps distinguish between isolated incidents and long-term financial stress. A conversation with the customer can reveal whether this delay is due to typical project funding cycles or a deeper cash flow problem, allowing you to act accordingly.
Structuring Flexible Payment Terms
If you decide to offer a payment extension, the next step is to ensure the terms are clear and well-structured. Without proper terms, granting an extension could lead to even more significant delays, affecting your cash flow and financial stability. Structuring flexible terms not only helps the customer but also protects your company.
Establish Clear Extension Terms
Once you’ve decided to grant a payment extension, ensure the terms are clear and documented. Adding extensions without structure can worsen cash flow. Material suppliers should establish concrete extension periods—whether it’s an additional 30 days or shorter intervals like weekly payments.
- The Benefit of Clarity: Establishing firm, written terms helps avoid confusion and ensures both parties are clear on expectations. Set precise due dates for each payment installment or charge interest on late payments. These clear boundaries ensure that any further delays are paired with clearly outlined consequences.
Use Conditional Extensions
You can offer conditional extensions for high-risk customers with poor payment histories or approaching their credit limits. Extend payment terms only under certain conditions, such as requiring collateral or using joint checks to guarantee payment when the project receives funds.
- Limit Exposure: Conditional extensions offer flexibility while protecting your company’s exposure to unpaid debts. Requiring a personal guarantee or lien waiver ensures that if the customer defaults, your company has recourse to recover the amount owed.
Knowing When to Tighten Credit Terms
Even when aiming to maintain positive relationships, credit professionals must recognize when tightening credit terms or declining an extension is the best course of action. Recognizing red flags early on is crucial due to the longer payment cycles in construction projects, which offer little room for cash flow errors.
Recognizing Trouble Ahead
Material suppliers often deal with multiple payment applications, lien waivers, and compliance documents.
But when extension requests become frequent, it’s time to pay closer attention. A customer asking for multiple extensions or exceeding their credit limit may indicate deeper financial issues.
Your primary concern is cash flow—and extending terms without caution can lead to serious cash shortages that affect your ability to fulfill other contracts.
- Identifying Red Flags: If extension requests start becoming frequent or a customer approaches their credit limit, it could indicate their financial health is declining. Regularly reviewing indicators like UCC filings or credit utilization can help you catch potential issues sooner. When these warning signs appear, it may be necessary to adjust credit limits or request additional security to safeguard your company.
Deciding When to Decline an Extension Request
Sometimes, it’s best to refuse a payment extension to avoid getting further entangled in delays that could strain cash flow. With long payment cycles, extending credit without careful consideration can leave you unpaid for even longer. If you notice financial instability or a consistent pattern of delayed payments, it’s time to reconsider further extensions.
- How to Approach It: When financial instability becomes apparent, it’s important to balance maintaining the relationship with protecting your company’s financial health. Offering alternatives, like suggesting a shorter extension or setting up manageable payment installments, can allow you to maintain the relationship while safeguarding cash flow. If the situation worsens, declining the extension outright may be the best option to prevent further risk.
Next Steps for Managing Risk
Handling payment extension requests requires a careful balance between flexibility and risk management, especially for material suppliers in the construction industry. You can maintain positive customer relationships while mitigating the risk of unpaid debts by assessing the customer’s payment history, understanding the reasons for the request, and structuring terms that protect your company’s interests.
Ultimately, the goal is to support your customers through tough times while ensuring your company remains financially stable.