Report: COVID-19 has Slowed Project Payments
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:
Additionally, the survey showed that the type of project also plays a part:
The survey also looked at what companies turn to for solutions to speed up payments. Those findings include:
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.
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.