Accounts Receivable in Construction: Managing Retentions, Variations, and Slow-Paying Head Contractors

# Accounts Receivable in Construction: Managing Retentions, Variations, and Slow-Paying Head Contractors

Construction is the single worst-performing industry for accounts receivable in Australia — and it is not particularly close. DSO commonly runs 60 to 90 days, retentions tie up cash for years, and variation disputes can leave significant invoices outstanding for months with no resolution in sight.

Understanding why construction AR is different is the first step to managing it better.

Why Construction Payment Culture Is Uniquely Difficult

Payment in construction flows from principal to head contractor to subcontractor to supplier. Every layer in that chain introduces delay. When the principal is slow, the head contractor is slow. When the head contractor is slow, every trade subcontractor down the chain is slow — regardless of what their individual contracts say about payment terms.

This cascade effect means that even well-run construction businesses with strong contracts can find themselves waiting 60, 75, or 90 days for payment on work they completed in 30.

Retentions: Cash Tied Up for Years

Retention clauses allow head contractors to withhold a percentage of each progress payment — typically 5 to 10% — until practical completion and defects liability expiry. On a $2 million subcontract, that is $100,000 to $200,000 sitting with the head contractor for 12 to 24 months.

Retentions are legitimate in construction but they require active management. Subcontractors who do not track retention release dates, submit formal claims on time, and follow up systematically often find retentions either not paid or significantly delayed past the contractual release date.

Variation Disputes: The Most Common Reason Invoices Age

Variations — changes to the original scope of work — are the most common source of invoice disputes in construction. Head contractors frequently dispute the value of variations after the work is complete, leaving the subcontractor holding an invoice that cannot be collected until the dispute is resolved.

The best protection is documentation before the work starts: written variation instructions, agreed rates, and acknowledgement of the scope change. Verbal instructions followed by invoices are the source of most variation disputes that end up aged 90+ days in a subcontractor's AR ledger.

Security of Payment Legislation: The Tool Most Subcontractors Underuse

Every Australian state has Security of Payment legislation that gives subcontractors the right to serve a payment claim and receive a payment schedule within defined timeframes — and to adjudicate disputes quickly without going to court. Most subcontractors know this legislation exists. Fewer than half use it systematically.

A payment claim served under the relevant SOP Act creates a legal obligation to respond. Failure to respond often means the claimed amount becomes due in full. This is the most powerful tool available to subcontractors with overdue invoices — and it is significantly underutilised.

AR Automation in Construction

Kuhlekt supports construction businesses with structured progress claim tracking, retention registers, variation dispute workflows, and automated follow-up on payment schedules. If your construction business is managing retentions and progress claims in spreadsheets, the risk of missed deadlines and unpaid retentions is significant.