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Report: Slow Payments Cost Industry $136B

Tuesday, November 16, 2021

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A recent study conducted by construction and real estate financial software firm Rabbet found that slow payments this year are on track to cost the construction industry $136 billion.

The survey, conducted in September, polled subcontractors and general contractors to find out how slow payment on the part of their customers impacted the overall industry and is over double what Rabbet reported in 2019.

2021 Slow Payment Report

In its most recent report, Rabbet has found that due to slow payments the construction industry is slated to see an increase in its costs related to the matter for a second consecutive year. Specifically, the industry is expected to witness a 36% uptick, or approximately $136 billion, respectfully.

During the polling phase of the survey, Rabbet found that when contractors are forced to cover the cost of wages and materials without being paid promptly for them, those costs are passed on in the form of higher bid prices and project delays.

JONGHO SHIN / Getty Images

A recent study conducted by construction and real estate financial software firm Rabbet found that slow payments this year are on track to cost the construction industry $136 billion.

Other major takeaways included:

  • 86% of general contractors said that payment delays directly affect project deadlines;
  • 83% of subcontractors reported that late payments from a general contractor affects productivity;
  • 74% of general contractors have had to pay more for labor or charge more for labor to meet a project schedule deadline in the last 12 months;
  • 72% of subcontractors would offer a discount on their invoices if their customers would pay within 30 days;
  • 67% of subcontractors have decided not to bid on a project if the general contractor or owner has a reputation for slow payments;
  • 35% of general contractors– and 28% of subcontractors– responded that at least some of their work has been delayed or stopped because of late payments in the last 12 months; and
  • 17% of subcontractors reported filing a mechanics lien in the last 12 months because if slow payments.

In recognizing that subcontractors take on more risks associated with slow payments since they are required to finance the majority of a project’s labor and material costs, Rabbet inquired how they finance operations. In its survey, subcontractors reported the following methods:

  • Cash on hand/balance sheet (39%);
  • Line of credit (36%);
  • Credit card (22%);
  • Personal savings (15%); and
  • Retirement savings (6%).

General contractors, who reported spending about 21 hours per month managing payments to subcontractors and vendors, recommended a shift toward automatic, instant or direct payments.

According to additional research conducted by material financing company Billd, 63% of the businesses it surveyed paid for materials before receiving payment for their work even though almost 74% of contractors had repayment terms with their material suppliers of 30 days or less.

The company has recently launched a new product, Pay App Advance, that offers contractors quick access to financing to help cover their payroll costs.

Slowed Payment History and COVID-19 Impact

Conducted in partnership with construction project management software company Procore Technologies, in 2019, Rabbet reported that slow payments in the construction industry were costing general contractors and subcontractors roughly $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 showed a $24 billion increase.

At the time of the 2019 study, Rabbet and Procore found that an average 51-day payment turnaround hurt labor- and material-intensive subcontractors. Furthermore, more than 60% of the same subcontractors reported that they were choosing not to bid on certain projects if the owner or GC was known to pay wages late, while 72% reported that they’d offered 1%-5% discounts within 30 days just to receive payments more quickly.

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

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 understood 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.

A more recent report conducted in June by construction software company Levelset found that only 11% of construction business always get paid in full— a reported 75% drop compared to pre-pandemic.

The “2021 Construction Cash Flow & Payment Report” was based on a survey of 764 construction professionals and explored the financial challenges faced by the people and companies that make up the U.S. building industry, according to Levelset.

The report also detailed that payment delays worsened, with just 9% of companies always getting paid on time— a 60% decline from last year.

The report found disparities between general contractors and subcontractors, such as:

  • General contractors are four times more likely than subcontractors to get paid within 30 days and 50% more likely to get paid in full;
  • One in five subcontractors, suppliers and other sub-tier parties regularly wait beyond 60 days to collect payment; and
  • 56% of subcontractors wait more than 60 days to collect retained funds, compared to just 16% of general contractors.

Additionally, the survey showed that the type of project also plays a part:

  • Residential construction companies are three times more likely to collect payment within 30 days than those on commercial projects, and five times more likely than those on public projects; and
  • Only one in five homebuilders (17%) say they always get paid on time, they outperform those on government projects (7%) and commercial jobs (4%).

The survey also looked at what companies turn to for solutions to speed up payments. Those findings include:

  • 83% of construction businesses have the ability to accept electronic payments and 79% say it has helped their company get paid faster;
  • Companies using software for tracking and processing payments grew 113% year-over-year;
  • Software for payment paperwork is up 67% since 2019; and
  • Just 8% of construction companies say they don't use software at all— down from 21% in 2019.

Most recently, in September, Procore announced its plans to acquire Levelset. As part of the deal, Procore agreed to pay approximately $425 million in cash and $75 million in Procore common stock.

According to a press release, the acquisition is expected to allow Procore to “add mechanics lien rights management to its platform, helping the company to manage complex compliance workflows and improve the payment process in construction.”

The mechanics lien rights process varies from state to state and often requires a mass of documents be filed according to strict timelines. However, construction businesses must take on this burdensome task or risk losing their right to file a mechanics lien, which can be a critical collection tool.

“Construction payment is a hard, complicated mess, full of risk,” said Levelset CEO Scott Wolfe Jr. at the time. “It's our vision to empower this industry to always get what they earn and never lose a night's sleep about payment and cash. This combination with Procore brings Levelset that much closer to delivering this mission into the world.”

The companies expect to finalize the acquisition in the fourth quarter of this year.

That same month, Procore also announced that it would be partnering with Billd. Through the new partnership, Procore reports that users will be able to access Billd's services on the Procore platform.

   

Tagged categories: Business matters; Commercial contractors; Contractors; COVID-19; Economy; Finance; General contractors; Good Technical Practice; Industrial Contractors; NA; North America; Project Management; Projects - Commercial; Subcontractors

Comment from Michael Halliwell, (11/16/2021, 11:30 AM)

Sure, things like COVID have slowed things down....but I wonder how many of the project managers are also listening to one of the current mantras of project management training: "bill fast, pay slow"?


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