Managing construction payment is hard. Unnecessary complexity, hidden participants, new and intricate legislation, and more, all combine to create large amounts of financial risk. Companies working in construction, from GCs to suppliers, and equipment rental companies to specialty subcontractors all face slow payment, nonpayment and the risks associated with slim margins or the need to float project costs. Managing and avoiding financial risk is critical to running a successful construction company, but simple mistakes can derail a project, lead to bad outcomes and result in a giant payment mess.
Contractor profit margins have been generally sinking for the last 40 years, and many contractors are not confident in a rebound. With profit margins of 1.5% – 2% normal, slow payment or nonpayment on just a handful of projects can mark tough times for many in the construction industry. Since it takes construction participants an average of 73 days to get paid after submitting a payment application or invoice, the financial pains and risks to are an everyday fact of life. In fact, according to the National Association of Home Builders review of American Entrepreneurs survey data, more than 60% of construction firms cite late/nonpayment by customer, and access to or cost of financial capital as items with a negative impact on profit.
Three common mistakes that increase financial risk and kill construction company finances
Mistake Number 1: Not Sending or Requesting Notice
Sending preliminary notice can get a bad rap – especially if a particular project is in a state with no specific notice requirements, or a particular participant is statutorily required to provide a notice. Sending and requesting notices, however, is one of the easiest ways construction companies can ensure and speed up payment.
Visibility can be tough on construction jobs. With multiple tiers of subcontractors, suppliers and equipment lessors all having their own contractual relationships, seeing other parties up and down the payment chain on a project can be difficult. The best way to fix this issue is by proactively providing that visibility, or by requesting that the visibility be provided. Sending notice of project involvement up the chain ensures that everybody on the project is known. This means less fumbling around obtaining lien waivers when payment is to be made, less worry about hidden claims and fewer reasons to withhold payment.
Construction participants should not shy away from asking for information, both from lower-tiered parties and from above. This is especially powerful when the request is made down-the-chain. If a GC made it known that the receipt of informational or visibility notices was helpful, suppliers and sub-subs would be less likely to worry that “skipping a level” and communicating directly with the GC or sub would somehow reflect poorly on their own customers.
Finally, preliminary notices may be required from certain participants in order to retain lien rights. While liens should be a last resort, they remain powerful tools to ensure that payment is made. The ability to file a lien should be retained as a last resort if payment issues spiral completely out of control.
Mistake Number 2: Complex Paperwork
Another basic mistake that construction companies routinely make is using complex paperwork and unnecessarily complex requirements in the payment process.
Construction payment involves a lot of paperwork, and much of it is unavoidable. Other than notices, there are also pay apps, lien waivers and other documents being exchanged constantly. Making sure that only the unavoidable paperwork is the paperwork required can ease the overhead and streamline payment. The more requirements that get piled on to the payment process, the slower it goes and the more chance there is for payment to fall through the cracks. The worst part about the friction caused by excessive and intricate paperwork requirements, is that it’s almost entirely artificially created.
Exchanging payment documents should be easy – work is done and payment for the work should be given. However, construction companies have built up such protectionist “CYA” policies that they routinely get in their own way, and slow down payment for themselves and other parties on the project. Many companies search for any potential avenue for exerting legal leverage. In many situations, these opportunities for legal positioning are available in the documents surrounding payment.
Some complexity is built directly into the law. Actual requirements and certain payment documents and processes can be complex. However, much of the complexity is voluntarily created. This is sometimes to obtain a better legal position, as mentioned above, and sometimes just because “it’s always been done this way.” Remaining tied to rules that aren’t actually rules, or requirements that aren’t actually requirements, unnecessarily complicates what should be easy.
Luckily, this is an easy fix. By undertaking a scrutiny of internal paperwork requirements, construction participants can start clearing the air around what’s necessary and what is getting in the way of easy quick payment, for the sake of dubious legal gains. Companies must make sure “requirements” are not just traditions and divorce themselves from the need exert legal leverage when it’s better for everyone to just make the process open, clear and simple.
Mistake Number 3: Letting Fires Burn
The last mistake that construction companies make far too often is hunkering down and failing to openly communicate, especially when there is the whisper of a payment dispute on the project. While payment issues can be lessened, there are no silver bullets to ensure that construction payment issues can be completely eliminated. Fires and disputes will happen occasionally and the way that the issues are discussed and worked through is crucial.
It can be difficult to keep open channels of communication and clearly and openly communicate when fires do happen in the payment process, because construction payment troubles can be huge. Payment issues in construction can mean companies must tap liens of credit or stop spending and working completely. Since the potential consequences of payment issues are so huge, companies find it easy to let disputes lead to expensive and lengthy litigation, bad blood and other problems.
The good news, though, is that the problems associated with poor communication on construction projects (and specifically with respect to payment issues) can be easily eliminated. Just like the other problems discussed above, this problem has a simple fix. Put in the effort to openly communicate. Being a good communicator on a construction project means making an effort to make sure the information gets where it needs to go and when it needs to get there. Many payment fires can be snuffed out if the proper parties get the right information at the right time.
It’s important to realize that not all “communication” is real communication, however. A common mistake is lawyering up before trying to talk the issue out. Legal positioning and trying to assert leverage just make things harder on everybody. Lawyering up makes everyone shut down, close off and fight. Rather than allowing open and honest communication to quench the dispute, getting the lawyers involved stokes the fire instead.
One other common issue is that parties don’t want to talk at all, and pretend that small disputes will just go away. Liens, contract notice provisions, prompt payment or retainage and other potential issues all have important timetables. And by communicating clearly, effectively and openly without waiting can provide more time to have the potential issue worked out prior to the last resort of a lien or litigation.
Any of these three problems can sink a construction participant, but each of them is easy to manage and avoid. Companies that take a good hard look at their own practices and procedures can get a huge leg up in making sure that their jobs are successful and payment issues are avoided.
