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Report: Slow Payments Cost GCs $64B a Year

Thursday, October 24, 2019

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A recent study conducted by construction finance platform Rabbet, in partnership with construction project management software company Procore Technologies, found that slow payments in the construction industry are costing general contractors and subcontractors about $64 billion a year.

Compared to the 2018 report conducted by Contract Simply—now known as Rabbet after adding general contractors into its respondent mix—the results show a $24 billion increase over last year’s report.

Report Highlights

In reviewing the information collected from the study, Rabbet and Procore found that an average 51-day payment turnaround hurts labor- and material-intensive subcontractors. Furthermore, more than 60% of the same subcontractors reported that they have chosen not to bid on certain projects if the owner or GC is known to pay wages late, while 72% reported that they’ve offered 1%-5% discounts within 30 days just to receive payments more quickly.

The percentage discounts offered by the subcontractors have shown to save the construction industry approximately $44 billion.

JONGHO SHIN / Getty Images

A recent study conducted by construction finance platform Rabbet, in partnership with construction project management software company Procore Technologies, found that slow payments in the construction industry are costing general contractors and subcontractors about $64 billion a year.

Regarding the issue of making late payments, only 39% of subcontractors reported that they had the ability to cover the costs, although these payments were made with either cash on hand or, incurring the costs associated with using lines of credit, credit cards, personal savings and even pulling from retirement savings.

Moving up the ladder, 35% of GCs were reported to have to look for sources outside their balance sheets for alternative financing, while roughly 22% reported that they have held back subcontractor payments in order to increase their own working capital. However, contractors with less than $5 million in annual revenue were the only GCs to most likely practice this.

Also discovered in the survey was that 95% of GCs understand the value of paying subcontractors on time and that almost 75% of GCs were reported to pay more frequently than once a month, regardless that the payments incur as much as 35% in financing costs.

Rabbet adds that although owners risk possible project shutdowns—which are included in Rabbet’s estimated cost increases—making slow payments only drives their cost for a project up by about 5.3%, while all respondents reported that only 30% of work has been delayed or stopped due to late payments.

Related Laws

Many states have adopted anti-wage theft laws within their legislation while the U.S. Department of Labor has also cracked down on unpaid wages. In April, Colorado’s General Assembly’s House Judiciary Committee approved House Bill 1267, which changes wage theft of $2,000 or more from a misdemeanor to a felony.

And last year, Oregon also introduced a bill that aims to protect wages by requiring a general contractor to pay wages owed by a delinquent subcontractor if certain conditions are met.

Also in April, the Illinois House of Representatives passed 70-41 an amendment to the state’s Wage Payment and Collection Act, holding general contractors accountable for their subcontractors’ unpaid wages to employees.

Most recently, in August, a joint investigation between the New York State Department of Labor and the Manhattan District Attorney’s Construction Fraud Task Force uncovered approximately $6 million in stolen wages.

That discovery was reported to be the largest single wage recovery in the DOL’s 115-year history.

   

Tagged categories: Annual report; Asia Pacific; Building owners; Contractors; EMEA (Europe, Middle East and Africa); Finance; General contractors; Good Technical Practice; Latin America; North America; PaintSquare App - Commercial; Project Management; Research; Subcontractors; Z-Continents

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