How can technology help contractors manage payments to subcontractors?

Jesse DeMund
Vice President of Sales
Built Technologies

Technology powers efficiency at every stage of the payment process. That efficiency will empower the best contractors to spend less time concerned about payment management and more time focused on what matters most: building. At the end of the day, the more processes that are made digital, the faster contractors will be able to pay their subcontractors. And, contractors that are able to pay their subcontractors most efficiently will be able to maintain their competitive advantage in the market.

Technology solutions are designed to streamline and speed up the flow of money through the construction process. Automating these manual payment processes, such as compliance documentation and lien waivers, saves contractors valuable time, resources and, ultimately, money. From there, contractors can increase efficiency with capabilities such as accounting system integrations to ensure that every aspect of the payment process is seamless. While making the switch to a digital solution can be daunting for some, the benefits are hard to ignore.

Kara Judd 
Solutions Consultant
CMiC

A robust ERP technology can help contractors manage payments to subcontractors in the following ways:

• Streamlining the invoice-to-payment process, which increases the overall efficiency of the process while keeping employees organized and reducing human error.
• Project managers have full visibility of all invoices and can verify total invoice amounts before it is paid to a subcontractor, thus reducing any discrepancies.
• Contractors can monitor when payments are due, saving the cost of any late fees.
• Contractors will have foresight into their cash-flow requirements, allowing them to plan for any future shortcomings. This is particularly helpful when it comes to the challenges associated with cash-flow management, where many payments are made in advance to supply materials and other resources for projects.

Mike Milligan
Head of Global Marketing
GCPay

Four out of five general contractors say they spend a considerable amount of time chasing down payments. After all, managing construction payments is often manual and unorganized—making it complicated and time-consuming.

In construction, payment requests aren’t as simple as sending an invoice. Instead, a payment application (also referred to as an “application for payment” and “pay app”) is required.

Pay apps are documents that provide details on labor, materials, change orders and other project specifics. Essentially, it’s a request for payment with supporting documents and images. Common supporting documents in applications for payment include:

• Payment application forms;
• Schedule of values;
• Change orders;
• Lien waivers;
• Project status and schedules;
• Additional invoices and receipts; and
• Visual documentation.

Even though completing payment applications is slow and complex, research shows that fewer than one in three general contractors use software to organize, send and track payments and paperwork.

To streamline payments between general contractors and their subcontractors, pay app software solutions automate and standardize the payment management process.

With payment application software, general contractors can:

• Easily create and exchange lien waivers;
• Organize and collect compliance documents;
• Protect projects against delays; and
• Improve communication with subcontractors.

Best-in-class payment app software should integrate with your construction accounting software to save you time and make your payouts faster.

Jim Campbell 
Vice President of Construction
AvidXchange

With unprecedented supply-chain disruptions and skilled labor shortages, maintaining good relationships with subcontractors has never been more important. Furthermore, with additional regulations around pay-when-paid, particularly in the public sector, improved efficiency is a must.

Even with the best of intentions, subcontractor payments in the construction industry are complex. Pay application creation from an approved schedule of values, their workflow approvals and revisions, required compliance documents (most notoriously lien waivers)—is there any wonder? Pile on the inevitable change orders and the complexity continues to grow.

As always, reducing the use of paper processes is fundamental to increasing efficiency. By having the schedule of values, application for payment, lien waiver and payments all on a common electronic platform, contractors can exchange “dollars for documents” in a more systematic way, with controls in place to mitigate transfer risk for both parties. Additionally, electronic payments are executed in a more secure and timely manner and can ensure the associated compliance documents are in place and available when payment is executed. Reducing the paper chase helps to expedite pay-when-paid scenarios and improves operational efficiency.

The benefits of such an integrated system do not end with executing the payment and compliance documents. It also has the ability to support draw requests with executed compliance documents and substantiated billings for cost plus work. Even historical claim settlements are aided by having all related source documents in one platform that is accessible from both the office and remote locations.

What are the benefits and risks of a connected, cloud-based accounting system?

John Rosch
Regional Sales Manager
Explorer Software

Cloud-based accounting systems have been a rising tech trend over the last decade, and we have seen an acceleration in cloud adoption over the course of the pandemic. While companies have had their eyes on eventually upgrading to cloud software, the pandemic really brought into focus the need to have remote access, as well as the edge in business that cloud computing provides in terms of cost reductions and profit margins. The rapid drive toward this digital revolution has its share of both benefits and risks.

Security is the biggest concern among companies looking to make the leap to cloud-based accounting, and with good reason. Keeping data safe and secure against cyber threats is essential, and cloud software is not immune. There are actions companies can take to mitigate the threat, such as multifactor authentication, limiting data access of users and regular backups to reduce the impact of an attack.

A major benefit of using cloud software is that providers are aware of these threats and take the steps to ensure that data is stored as safely and securely as possible. Companies that take advantage of this also get the added benefit of not needing to spend money on their own IT hardware and staffing. If a company has invested in its own IT department or company it trusts, there are solutions, such as Explorer Eclipse, that allow the company to deploy software on premises or a data center of their choice to give them control of updates and backups.

By taking steps to mitigate security threats, companies are able to enjoy the many other benefits of innovative cloud-based accounting software. An artificial intelligence can be used to sift through large quantities of data to create actionable reports or even automation tools that can be used between departments to speed up workflows, thus lowering costs and ensuring projects stay on track and on budget. These cloud services are becoming the new normal for successful businesses.

Have you observed any trends in contractors’ ability to obtain surety bonding?

Jason Dettbarn
Vice President, Contract Surety
Merchants Bonding Company

There has been ample capacity for surety credit for several years, and that trend continues. The surety market remains on the softer side, with some companies making underwriting concessions that would have been unthinkable in previous underwriting cycles. Add to that the Infrastructure Investment and Jobs Act, which stipulates that no less than 10% of the money for federal Department of Transportation contracts should go to Disadvantaged Business Enterprise (DBE) qualifiers, and contractors’ ability to obtain surety bonding should see a positive impact in 2022. The $1.2 trillion for extensive improvements in the nation’s roadways, bridges, railways, waterways and broadband access will put construction spending at an all-time high for the next few years.

Some surety companies have added tools to help small and emerging contractors obtain surety credit while gaining the skills and experience to qualify for more. These include collateral, funds control and the SBA Surety Bond Guarantee program. We also see more and more contractors becoming knowledgeable about having a great team behind them, including their construction accountant, surety agent and surety underwriter.

What advice do you have for contractors that are still using spreadsheets to manage their businesses?

Dustin Stephens
Vice President, Construction and Real Estate
Sage

Managing business processes with spreadsheets increases the chance of costly errors; in an industry with notoriously tight margins, contractors don’t have room for error. Businesses that are still using spreadsheets should consider technology solutions such as accounting, project management and estimating software.

With the right technology tools in place, contractors can eliminate redundant and error-prone processes, such as duplicate data entry, as well as streamline their workflows. Estimating technology allows estimators to do production estimating work concurrently with both 2D and 3D content while significantly reducing takeoff time. By streamlining the process and eliminating additional error-prone work, firms can produce more accurate bids in less time, thus improving their bid-hit ratio. Integration with accounting and project management solutions further increases efficiency as it makes it possible to automatically export helpful data, including budgets, purchase orders and subcontracts.

While businesses are evaluating new technology solutions, they can make small changes today that can provide immediate gains and set them up for a smoother transition when they are ready to move away from their spreadsheets. They should begin by taking a close look at the spreadsheets they are currently using and determine if there are places where data must be re-entered. If so, they should consider whether there are better ways their systems can be set up to avoid double data entry and also take the time to look for other opportunities for process gains. This exercise will be beneficial now and as they implement new technology solutions.

Chris Porter 
Director, Product Marketing
Prophix Software

In construction, an industry buffeted during turbulent economic times, the need for continuous and agile financial planning and job-cost analysis is essential. Technology and analytics play a critical role in a company’s ability to gain competitive advantage and grow. However, that strategy can sometimes be hard to execute when the mode of delivery is spreadsheets. They may not be the obvious culprits, but spreadsheets continue to hamper a company’s ability to grow, increase profits and manage data security and risk.

It’s no secret that construction finance teams remain heavily reliant on spreadsheets. But inputting data manually into spreadsheets is time-consuming and error-prone, and the results are not easily manipulated or analyzed. Spreadsheets scattered with complex formulas often get corrupted during rounds of revisions across departments—an issue that has become more pervasive in today’s era of remote work. In 2020 alone, data shows, contractors lost an estimated $1.8 trillion to bad data, while one-third of bad decisions onsite were made because of bad data. This increases the need for automated tools that support continuous and agile financial planning based on trusted data.

Corporate performance management (CPM) technology gives construction leaders a comprehensive view of their businesses by connecting to all financial and operational data sources and providing updates to decision makers and job owners on demand. Further to the scope of traditional business intelligence, CPM software provides leaders with valid and integrated forecasting, which is key to more accurately estimating and managing project budgets and cash flow throughout their life cycles.

What technology is available now to allow contractors to learn from past projects?

Joel Hoffman
Director, Product Management
Acumatica

The construction industry is a highly competitive landscape and continually fluctuating industry, with companies looking to deliver projects with greater profitability performance. This puts construction companies in constant pursuit of maximizing profits on awarded contracts, while lowering margins on new bids to get more work. Getting the profit margins right is paramount to making many decisions at various project stages.

Profit margin forecasting is an important decision that construction businesses undertake during arly design stages. Without the proper information, accurately forecasting profit margins is difficult because many factors influence this choice.

Project teams may now decide profit margins based on intuitions or uniform rates, which are unreliable methods. Machine learning solutions help companies reduce or even eliminate profit fade for projects. This technology helps project managers and financial managers to detect risks by analyzing previous projects. By getting these early indicators, companies will know whether a project is going to be profitable or lose money. This information is determined early, rather than near the end of a project when it is too late to make any corrections.

Today’s technology uses known information to help companies “calculate risks” across multiple areas of the business and project. The results will predict and call out associated risks—for example, labor anomalies identified that would lead to project delays.

Machine learning tools of today utilize technology to assist companies when bidding new projects and with existing project analysis. This information holds profit margins in check, all from past information collected.

What cybersecurity best practices should construction firms have in place?

Mike Ode
Chief Executive Officer
Foundation Software

Having a cybersecurity plan is critical for construction companies. Lately, it seems like wherever you look, there’s another story about how a company suffered some type of cybersecurity breach. Construction companies aren’t immune—it’s usually the opposite. They’re often ideal targets—especially small to mid-sized companies—because of their lack of a security plan.

One of the first steps to take is to perform a tech audit. What devices are employees using to work with company data? What security is present on those devices? Are they all updated to the most recent software version? These are just a few questions to ask as you perform your audit. Once you have your audit plan in place, perform it routinely throughout the year to ensure nothing new was added that may have been missed and that best practices are still being followed.

If you don’t have a dedicated IT person on staff, you may also want to consider outsourcing to a trusted company that can perform a more thorough security audit and help you patch any potential security holes. Similarly, employee training on security best practices—like how to identify a phishing email—is crucial since anyone could expose the company to undue risk, even innocently.

Companies should also weigh SaaS software options for even more security. With SaaS, data is backed up regularly and stored offsite by the software provider’s team, meaning that there’s less risk of losing access to that data. Their IT teams also make sure that the data is secure and servers are fully patched, taking one more thing off of contractors’ plates.