Report: Slow Payments Cost Industry $136B
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.
Other major takeaways included:
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:
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:
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:
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.