Pandemic Magnifies Financial Risk in Construction: What Executives Can Do to Speed up Customer Payments
Construction businesses are waiting longer for payment in 2021, according to the newly released 2021 Construction Cash Flow and Payment Report conducted by Levelset.
According to respondents, only 10% of construction businesses get paid in full, which is a 75% drop from 2020, and only 9% get paid on time, which is a drop of 60% over last year.
The report, based on a survey of 764 construction professionals, illustrates that financial risk in the industry flowed down the payment chain. General contractors were four times more likely to get paid in 30 days, and 50% more likely to get paid in full. However, 20% of subcontractors, suppliers and other second-tier companies were kept waiting more than 60 days to collect payment.
What can construction executives do to get paid faster?
Use legal tools
Based on the report, construction businesses are becoming more comfortable using legal tools like preliminary notices and mechanics liens to help them enforce their payment rights. While only 29% of companies sent a preliminary notice on a typical project in 2020, in 2021 the number jumped to 51%. Also, businesses are more comfortable filing lien claims, 71% filed in the past year, which is a 22% increase from 2019.
Using preliminary notices speeds up payments because general contractors and owners want to protect their projects from potential liens. Preliminary notices let them know you’re on the job, and this increased visibility leads to faster payments.
Offer payment alternatives
One trend that is growing is offering electronic payment methods. Whether it’s by ACH, wire transfer, PayPal or credit cards, offering customers options has helped many companies speed up payments. In the survey, 83% of respondents have the ability to accept electronic payments, and 79% of them say that it helps them get paid faster.
Use software to track and process payments
Many companies use software to track and process their payment requests and receipts. There was a 113% increase in companies using such software. The number of companies using software for payment paperwork is also up 67% since 2019.
Software packages help companies track when payments are late and can often automatically prompt you to take the next step in your collection procedure. If you’re still tracking outstanding invoices by spreadsheet, there are lots of options to automate the whole invoicing process, including follow-up.
Prequalify customers
Construction businesses can help reduce risk by prequalifying their customers to ensure that they are financially stable and have a history of paying their bills on time. According to the survey, more than 50% prequalify new customers before signing a contract or extending credit. By doing research ahead of time, businesses know what to expect and can enter into the relationship with their eyes open. Requesting down payments and cash upfront can also help alleviate the long wait for payment.
Develop policies and stick with them
Construction businesses should develop and follow through with credit and collection policies. These policies help direct credit department employees about when to extend credit and what to do when payments are delayed. Proper follow-up is often key to collecting the payments without a lengthy delay.
The good news: The future is bright for construction
The good news is that the industry is doing better than this time last year. Many are confident that the economy will make a full recovery and that the future is bright.
Managing payments and the paperwork that goes with them is key to ensuring that construction businesses have the funds they need to grow and build their businesses.