Report: Slow Payments Cost Industry $208B

MONDAY, NOVEMBER 21, 2022


Construction and real estate financial software firm Rabbet recently found in a new study that slow payments this year are estimated to cost the construction industry $208 billion.

Completed in September, the survey polled subcontractors and general contractors to find out how slow payment on the part of their customers impacted the overall industry. When compared to what Rabbet reported last year, the impacts have worsened by $72 billion.

2022 Slow Payment Report

For its latest report, Rabbet surveyed how 137 general contractors and subcontractors across the United States managed working capital, bidding decisions and project risks in the face of slow payments during the last 12 months.

Like past years, the firm also found that due to slow payments the construction industry is slated to see an increase in its costs related to the matter for a third consecutive year. In 2021, new construction put in place in the nation was valued at $1.59 trillion, a slight increase from the $1.36 trillion in 2020.

This year, the construction industry is trending to reach an estimated value of $1.77 trillion. However, with these increases, the estimated cost of slow payments is also increasing, this year to 12% of total construction costs, or approximately $208 billion, respectively.

With these impacts in mind, respondents further shared with Rabbet that contractors are at a significantly higher risk of going out of business in 2022 than they were a year ago. The firm added that it is dire and pertinent to the survival of the industry that all developers and lenders be mindful of the elevated impacts.

In 2021, general contractors reported that rising material costs were their number one concern negatively impacting cash flow or preventing them from bidding on a project. This year, rising materials cost is the number one concern, closely followed by inflation.

Other major takeaways included:

  • 37% of all respondents report that work has been delayed or stopped due to a delay in payments to crew members in the last 12 months;
  • 27% of subcontractors reported filing a lien due to slow payments in the last 12 months;
  • 90% of general contractors surveyed see the value in paying their subcontractors faster;
  • 62% of general contractors have incurred billing charges, financing charges, or other costs when floating payments to others in the last 12 months;
  • 49% of contractors reported that they waited longer than 30 days to receive payment; and
  • All respondents reportedly added 12% to overall project costs.

In recognizing that subcontractors take on more risks associated with slow payments since they are required to finance most 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 (46%);
  • Line of credit (37%); 
  • Credit card (51%);
  • Personal savings (19%); and
  • Retirement savings (17%).

While subcontractors are noted to cover finances, it was also pointed out that general contractors using retirement savings to float payments for their business has multipled 8.5 times from the year before.

This year, 71% of subcontractors report considering the payment reputation of the owner when deciding how much to bid on a project. This number has remained consistent with 72% of subcontractors making this claim in 2020 and 78% in 2021.

A full copy of the report can be downloaded here.

Slowed Payment History

Earlier this year, construction software company Levelset found that while the industry has made a strong recovery from COVID-19 setbacks—reporting an all-time high of $1.57 trillion in July 2021—many construction business are continuing to struggle with cash flow and payment delays.

The “2022 Construction Cash Flow & Payment Report” was based on a survey of 519 construction companies and explores the state of the construction industry with respect to payment speed, cash flow, mechanics lien usage and more.

According to Levelset, the report also analyzes key differences between different segments of the industry, including various business roles, project types and annual revenues.

In analyzing the data, 61% of construction businesses reported to get paid more than 30 days after a job is completed, with more than half of those respondents saying it takes 41-90+ days to receive payment.

The report also details that only 12% of construction companies always get paid on time, citing problems with project financing, customer cash flow and general contractor mismanagement. However, Levelset adds that this number is consistent with findings from 2021. Similarly, only 15% of businesses say that they’re always paid in full.

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

  • General contractors are twice as likely as subcontractors to get paid within 30 days;
  • General contractors are four times more likely than subcontractors to report always getting paid on time;
  • 24% of subcontractors and 58% of general contractors receive payment within 30 days on average; and
  • One in five subcontractors regularly wait beyond 60 days to collect payment.

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

  • Half of all residential contractors report receiving payment in under 30 days, just 31% of those working on private commercial projects say they receive payment in under 30 days;
  • 23% of companies contributing to public projects say they’re paid within 30 days;
  • 15% of companies in private residential say they’re always paid on time; and
  • 9% of companies in private commercial and 8% of companies in public projects report always being paid on time.

The survey also looked at the impacts of late payments. Those findings include:

  • The three biggest consequences of late payments included wasted time and resources (45%), reduced profit (41%) and project delays or stoppages (32%);
  • 34% of respondents experience slow payments, while 29% sometimes stress over experiencing slow payments on projects;
  • 51% of respondents have filed a lien before and 31% reported on having to foreclose on a lien in order to get paid; and
  • 52% of respondents send a lien waiver in exchange for payment on some or all projects, while 48% rarely or have never sent a lien waiver.

In looking at the rest of the year, respondents reported that they were still concerned about rising costs (59%), supply chain issues (48%) and staffing shortages (39%) as major hurdles. Despite the challenges, construction companies remain optimistic about 2022, voting an overall rating of eight on a scale of 1-10, and expect some growth.

In 2021, 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 the year prior.

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; andJust 8% of construction companies say they don't use software at all—down from 21% in 2019.

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.

   

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

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