By Patrick Hogan
In the construction industry, late payments tend to be the norm rather than the exception.
Most contractors and material suppliers experience frequent payment delays and even nonpayment. In fact, a study found that a quarter of all B2B invoices issued in North America are overdue. One-third of these past-due invoices came from the construction industry.
In order for construction businesses to address these persistent payment issues and prevent them from happening, industry leaders must first take a deeper look into why they happen in the first place. Here are some reasons why there are late payments in the construction industry.
- The industry’s payment structure hinders fast payment.
Payment delays are rooted in the way billing works in the industry. In a typical construction project, stakeholders follow a hierarchical structure where payment priority starts from the property owner and proceeds to the general contractor, followed by a series of subcontractors, and then by the material suppliers.
Since contractors and material suppliers usually provide labor and materials on credit, stakeholders that are lower in the hierarchy will have to wait for those high up the ladder to get paid before they do.
The long wait for compensation is further affected by payment controls. Property owners and general contractors need to ensure everything is in order and that no double payment is made before proceeding with the payment. Property owners will rightfully want to avoid liens that might get filed against their property by stakeholders in the lower part of the payment chain.
- The construction market is competitive.
Construction projects are won through a competitive bidding process. Contractors compete against fellow contractors to secure a contract by promising high-quality work at the lowest price. Bidding is a necessary part of the construction process as it allows project owners to determine the cost of the project before proceeding.
However, the competitive bidding process may encourage contractors to use cheaper materials to meet the bid. Contractors may have to negotiate changes from the initial plan to avoid overspending. In addition, project owners may think that the work done is not up to standard compared to what was promised during the bidding process. Contractors may need to address these concerns before getting paid.
- Economic downturns have a great impact on the construction industry.
The construction industry is drastically affected by economic downturns. In the 2008 global recession, the number of construction firms in the country fell by nearly 150,000, and over 2.3 million workers lost their jobs due to layoffs and retirement.
Most construction companies rely on business loans to fund their operations. So, when the economy takes a turn for the worse, they will be unable to make payments. Lending requirements also tend to get stricter during a recession, making it harder for contractors to gain capital. Ultimately, this results in payment issues.
Payment issues are deeply rooted in the structure of the construction industry. By understanding why payment delays and nonpayment happen frequently, contractors will be better equipped in dealing with them in the future.
about the author
Patrick Hogan is the CEO of Handle.com, where they build software that helps contractors, subcontractors, and material suppliers with late payments. Handle.com also provides funding for construction businesses in the form of invoice factoring, material supply trade credit, and mechanics lien purchasing.