Report: COVID-19 has Slowed Project Payments

TUESDAY, JUNE 29, 2021


A recent report from construction software company Levelset, found that 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 explores the financial challenges faced by the people and companies that make up the U.S. building industry, according to Levelset.

The report also details that payment delays have 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. 

The Costs of Payments

Keeping in mind some of the general differences the Levelset survey showed between pre- and post-pandemic payments, this gives new context to a 2019 study conducted by construction finance platform Rabbet, in partnership with construction project management software company Procore Technologies, which found that slow payments in the construction industry are costing general contractors and subcontractors about $64 billion a year.

These results showed a $24 billion increase over the 2018 report.

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.

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.

   

Tagged categories: Business matters; COVID-19; Economy; Finance; Good Technical Practice; NA; North America

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