The construction industry has long been plagued by slow payments that just keep getting slower. PwC research shows that construction companies wait 83 days on average to get paid and sometimes as long as 180 days—the longest period of any industry in the world, putting them in real financial peril every day. Construction companies, particularly small to mid-size businesses, need a payment strategy to accelerate payments now more than ever, and here are five key reasons why.
1. Being prepared for a worst-case scenario
Many construction companies run on such razor-thin margins that one missed payment can bring the company to its knees. For this reason, contractors need a consistent mechanism to remind clients when payments are due. Close to 99% of the time, clients will pay (even if late), but contractors also need a mechanism to ensure using lien notices and liens to motivate the client to pay them at the earliest. No client wants a lien on their property—it’s very disabling from a refinancing or selling perspective. Construction liens must be filed within 90 days of the last date that a contractor provided materials and/or services for a project, but companies often make errors as to what actually constitutes this “last date,” leading to late lien claims, lots of disputes—and inevitably slower cash flow.
2. Providing demonstrable insight into financial data
Today’s payment systems deliver an added bonus—providing deep visibility into a construction company’s rich transactional data. Such data can demonstrate a construction company’s overall creditworthiness, increasing the contractor’s attractiveness to lenders and allowing it to borrow at lower interest rates and even to qualify for funding when traditional banks don’t.
3. Taking on or looking to make the move into public projects
With Biden’s federal infrastructure package set to pass, many private construction companies are looking to make the leap into public projects, but there are two important things to consider. First, contractors must be able to compete for such projects, which means companies that traditionally pursue $5 million to $10 million projects are now putting themselves in the game for orders of magnitude more expensive public projects. Contractors will therefore need a way to quickly and easily expose themselves to a broad range of high-quality lenders to secure needed capital for bonds and other larger project requirements. When combined with demonstrable financial data as discussed above, this can be especially powerful because it shows that contractors are financially secure to a very broad range of lenders.
Second, public projects do not offer construction companies the financial protection of liens, so contractors will need access to alternative instruments that provide similar protections. Modern payment platforms are continuing to evolve to provide such capabilities.
4. The COVID-19 crisis is making the late payment and slow cash flow problem exponentially worse for companies
Specifically, COVID-19 has triggered a series of macro-economic issues like a nationwide labor shortage, fuel shortage and rising lumber costs which are all trickling down to construction. These factors are leading to delayed projects, hefty upfront costs and more, which only serve to exacerbate an already bad situation. It’s not surprising that many construction companies are finding themselves in a constant financial state of house-of-cards.
Having a payment strategy can help contractors better survive this environment by automating and expediting traditionally paper-based processes that are time-intensive and error-prone. By “greasing the skids” of their cash flow, contractors can become much more efficient at collections. An added advantage: contractors are sending the message that they have a solid strategy in place and clients shouldn’t be lax.
5. Finding a better way to deal with constant change orders
These days, clients have more choice in materials than ever before, and unforeseen factors (like the discovery of mold) almost always happen. This translates to near certainty for contract amendments, a process that can take weeks or months. Construction companies will often cover the upfront costs of these material changes and added work, but if there is a dispute before the contract is finalized and the project completed, they may be left “holding the bag.” Clients can make many excuses not to pay, and many construction companies get burned this way. Fortunately, payment systems now offer functionality (like e-sign) which make contract amendments virtually automatic, insulating construction companies from any potential financial risk downstream.
The advantages of having a reliable payment strategy in place are clear—and yet, only a small minority of construction companies have such strategies in place. There are several possible reasons for this, ranging from the high cost of construction software to a generally risk-averse industry culture. Construction companies tend to stick with what they know, but this risks sacrificing vital transformation at a critical juncture in the industry’s history.
