Did you know that the construction industry develops $1.3 trillion worth of structures each year? It is incredibly lucrative in the U.S. and projected to experience a comfortable growth; however, it is also a tedious, dysfunctional, and financially risky business for subcontractors, sub-subcontractors, and other small players who quickly learn that construction does NOT always pay – well, at least not on time.
The construction payment system is dangerously flawed with little reform and accountability for slow payments that added $64B in excess costs to the industry in 2019 as noted in a report by Rabbet and Procore. This is a steep increase from the $40B in excess costs in 2018 reported by Contract Simply. 88% of contractors wait greater than 30 days to get paid, and 46% wait 60 to 90 days while tapping into lines of credit and even personal savings to cover the fees and other costs of floating slow payments.
Who is to blame?
The inherent problem of slow payments typically begins with owners at the highest tier of a project keeping tight control of the payment process including invoice approvals and disbursements. Project payments often teeter on when or if the owner pays the general contractor (GC) so that money can trickle downhill. The GC accepts this financial risk to secure a large contract and concedes negotiation leverage to the owner at the top of this warped payment chain. The GC will then mirror the owner’s heavy-handed tactics to lessen its financial risk by encouraging the execution of one-sided subcontractor agreements that eliminate any binding obligation for the GC to pay subcontractors and/or other contracted parties until the GC collects payment from the owner. These are pay-when-paid or pay-if-paid provisions that you should always look for and counter. The master agreements usually exclude financial penalties for slow payments too. Subcontractors will in turn mirror the GC by accepting similar financial risk in order to win a bid. The inevitable shift of responsibility and risk exposure continues to flow downhill to the smallest players in line for payment. These are usually small and medium-sized businesses that are far less positioned than their well-established counterparts to float the debts incurred on construction projects ranging from thousands to millions of dollars. Furthermore, they aren’t usually funded to afford lofty interest charges on lines of credit or credit cards as they scramble to pay vendors for products supplied and employees for work performed. Acquiring short term loans is often problematic and expensive for small businesses, and they may not have money to hire an attorney to demand payment. Slow payments cause all parties on the project to suffer including the project itself that is burdened with spoiled relationships, delays, liens and lawsuit distractions, and (of course) excess costs.
What is the solution?
Pay your bills on time! That’s how simple it is. Someone should pay Robin Steel for such inventive advice, but that payment would probably be slow as well. Seriously, the cycle is ruthless. The excess costs of fees, interest, and other expenses to float slow payments create a ridiculous burden on the industry – an industry that is otherwise a shining star for its long-term stability and positive projections.
As your company waits for an overdue check or your company is overdue in sending one, here are a few common options for speeding up future payments that I gathered from my research:
- Leverage technology by implementing payment automation software to streamline the arduous tasks of managing monthly draw requests and related documents.
- Offer % discounts as incentives for upfront payment or payment within 30 days. Rabbet and Procore’s construction survey showed that 72% of subcontractors would be willing to do this.
- Begin each project with a clearly defined schedule for deliverables and payments within your contract as this will be an important factor in collections should that be necessary.
- Request a legal consultation with a construction attorney to understand the full breadth of your collection options including liens, demand letters, and litigation as the last resort.
Regardless of what option(s) you choose to remedy slow payments, maintain your professionalism and integrity throughout the notification and collection process. Don’t be taken for granted as you have more leverage than you think. According to Rabbet and Procore, 63% of subcontractors choose not to bid on a project due to an owner or GC’s reputation for slow payments, and they should. It is this demonstration of power (by those otherwise perceived as powerless in construction) that will slowly change the status quo if nothing else does. Remember that not all business is business worth having.
By Melethia at RS