Building on Solid Ground: Managing Credit Risk in the Construction Industry

The construction industry builds our cities, homes, and infrastructure—but behind the cranes and concrete lies a quieter risk that can derail even the most promising projects: credit risk.

Whether you’re supplying materials, renting equipment, or managing a subcontracting team, understanding and managing credit exposure is essential to protecting your business and maintaining cash flow. The unique financial structure of construction projects makes the industry particularly vulnerable to slow payments, defaults, and cascading financial strain. Here’s how to stay ahead of the risk.

Understanding the Risks

1. Payment Delays and Retainage

It’s not unusual in construction to wait 60, 90, or even 120 days for payment—often longer when retainage (5–10 percent of the contract value held until project completion) is involved. Delays ripple down the chain, affecting subcontractors, suppliers and rental providers.

2. Project Dependency

When payments are tied to a single project’s success, any delay or cancellation can put your entire receivable at risk. If a job gets paused due to permitting issues or funding shortfalls, it may be months before you’re paid—if at all.

3. Slim Margins, Heavy Debt

Many construction firms operate on tight profit margins and high leverage. This leaves them vulnerable to even small disruptions in cash flow, increasing the likelihood of default when unexpected costs or delays hit.

4. Subcontractor and GC Chain Risk

One broken link in the contractor chain—such as a bankrupt subcontractor or a defaulting general contractor—can halt an entire project and stall payments to everyone involved.

5.Regional and Legal Complexity

Lien rights, notice periods, and bond protections vary from state to state. If your credit policies don’t account for local regulations, you could lose your right to recover unpaid funds.

Smart Strategies for Credit Risk Mitigation

1. Strengthen Credit Evaluation Processes

Before extending credit, conduct due diligence. Use commercial credit bureaus like D&B or Experian to assess risk and don’t hesitate to request financials for larger exposures. For smaller or newer firms, a personal guarantee can help secure your position.

2. Set Clear Terms and Credit Limits

Establish defined payment terms—typically Net 30—and enforce them consistently. Assign credit limits based on risk, project size and payment history. Don’t let a “good relationship” override good credit policy.

3. Use Job Information Sheets (JIS)

A JIS helps you gather essential details about the project, the owner and the general contractor. This information is critical for protecting lien and bond rights in the event of nonpayment.

4. Preserve and Enforce Lien Rights

Know your deadlines for preliminary notices and mechanic’s liens. Missing a single notice window can cost you thousands in unpaid balances. When necessary, don’t hesitate to file—liens and bond claims are your legal tools to secure payment.

5. Apply High-Risk Terms When Needed

Customers with weak credit should be placed on Cash-in-Advance (CIA) or Cash-on-Delivery (COD) terms. Do not release materials or assets until payment is received. It may feel like a tough stance—but it’s essential when risk is high.

6. Align Billing with Project Milestones

Ensure that your billing cadence matches project progress. If your invoices come too early, they may sit in an approval queue. Too late and you may miss your customer’s cash flow window.

7. Monitor Aging and Act Early

Track Days Sales Outstanding (DSO) and escalate accounts as they age. Balances over 60 days should trigger proactive outreach. Don’t let small overdues grow into write-offs.

8. Incentivize Faster Payments

Encourage ACH, EFT, or online portals for speedier transactions. Reducing reliance on paper checks also cuts down administrative costs and mail delays.

The Bottom Line

The construction industry is built on trust—but credit shouldn’t be. By developing sound credit practices, staying vigilant on project developments and using legal protections to your advantage, you can strengthen your company’s financial foundation—brick by brick.

When credit risk is managed strategically, you’re not just financing someone else’s job—you’re protecting your own future.