Slow payments cost subcontractors as much as $40 billion each year, according to Contract Simply’s Construction Payments Report 2018. In the U.S., subcontractors often wait as long as 54 days for payment, confirming PwC findings that subcontractors have one of the longest waits for outstanding payments. Subcontractors typically build the cost of collections into their bids, which adds an estimated $3.3 billion annually to the overall cost of projects.
The survey finds that 83 percent of contractors have filed a lien against a project because of slow payment, and almost nine in 10 contractors have waited more than 30 days to be paid. Most subcontractors maintain a credit line because of this gap with 46 percent paying finance charges of one to five percent, and 29 percent owing six to 10 percent. The cost is typically included in project bids.
Seventy percent of subcontractors say they would offer a discount of one to five percent if they received net-30 payments.
Seventy percent of subcontractors say they would offer a discount of one to five percent if they received net-30 payments. This could save contractors as much as $18 billion if the practice were widespread.
Still, there are ways to get around this issue. Contract Simply recommends these strategies to speed up payment:
A digital solution to track and expedite payments
Offering payment options such as wire transfers, ACH, and push-to-debit
Using digital collection of liens to eliminate friction between the contractor and subcontractor
Automating invoice approval and daily reminders
“There are a whole host of factors that make it challenging for general contractors to pay net 30 days. Perhaps the most significant factor is the collection of documents needed by the builder or borrower to request a draw from the lender to cover costs and fund the project. What’s a draw request? For larger commercial projects, a draw request is a package containing 500 to 1,000 different documents like invoices, PDFs, receipts, lien waivers, emails, and more. They can be overwhelming to pull together and even more difficult to process,” notes Tim Ryan of Contract Simply.
More and more contractors are using software like Contract Simply’s. It automates payments and provides same-day ACH transfers. It also centralizes and organizes the collection of documents needed to request a draw from the lender to pay costs, including invoices, emails, and tax forms.
If payment isn’t forthcoming and a subcontractor files a mechanic's lien, communication with a contractor can become problematic. If that happens, zlien may prove useful. Zlien organizes payment information, automates the collection process, and enables a subcontractor to quickly send a notice of intent before getting to the point of filing a mechanic’s lien.
A lien can be prevented by increasing communication and visibility of the payment process, according to zlien. The software allows a builder to see who else is on a project, view preliminary notices, and increase communication.
“They need to recognize that technology is changing the design, procurement, and construction of projects to make processes more efficient and less expensive.”
If a mechanic’s lien is filed, and the contractor can’t pay, sometimes a subcontractor can collect from a surety bond issued for the project. Again, going to this length to recover payment causes a strain between companies.
PwC’s 2017 report on Engineering and Construction Trends closes with this advice to firms:
“They need to recognize that technology is changing the design, procurement, and construction of projects to make processes more efficient and less expensive.” Streamlining payment systems is one piece of the evolving construction industry.
The Construction is based on a survey of 1,300 contractors in a wide range of trades. Building Connected, which partnered with Contract Simply to conduct this survey, offers pre-construction software that can be integrated with Procore.