Getting paid in construction is hard. But we probably don’t need to tell you that. The truth is that construction has the slowest payments of any industry, and things are only getting worse. That is according to a 2021 Construction Payment & Cash Flow Survey of 764 construction businesses across the US.
At 83 days, the industry had the highest Days Sales Outstanding (DSO) of any sector in 2018. Slow payments wreak havoc on cash flow, which is critical to success in construction — cash flow problems are the #1 reason for company failure. Projects often require contractors and suppliers to outlay large sums of money at the start of a job and spend a lot of time and energy trying to collect payment several months down the line.
It’s hard to know exactly why payments are slower than they have been in the past. We can speculate that the pandemic and subsequent shutdowns have made an impact. Getting documents, like pay apps and lien waivers, signed was more difficult, as many signers weren’t in the office. Check processing was slowed as well, although some contractors started taking electronic payments in an attempt to speed things up.
The good news is that contractors and suppliers are taking more action to get paid, and many are being proactive about increasing cash flow in construction.
Construction payments are getting later
According to the survey, just 9% of companies say they always get paid on time. This is a 60% drop from the 2020 survey (performed before the pandemic hit). Most respondents offer payment terms of 30 days or less.
While most recognize that late payments could be the result of issues up the payment chain, others think it’s more personal. “They take so long because they have little, if any, incentive to pay us on time!” says one respondent. Another says, “They use us as their bank, and we are not a bank.”
Payment timelines are being extended: only 23% of construction companies say they typically get paid within 30 days, a 41% drop from 2020 and down 60% from 2019. While 69% say they are paid within 75 days, and 5% wait more than 75 days for payment on average.
Effective communication is the number one tactic used by companies to help ensure on-time payment (used by 46% of respondents). Next is setting clear expectations with their customers (44%) and choosing the right jobs (37%).
Contractors aren’t getting paid in full, either
Just 11% of construction businesses always get paid their full contract amount — a 75% decrease from 2020, and an 83% drop from 2019.
Change orders are a big point of contention when it comes to payments. One respondent from New York describes a typical situation: “The public owner or agency sits on change order requests without approving them, and then they hold payment until the end of the job. By contract, we cannot refuse to perform work directed by the Owner/Agency. The Owner/Agency will take over a year to pay the change order (and only after they cut the amount without discussion).”
Looking for results
Contractors and suppliers, especially those in lower tiers, don’t have much influence on how quickly they get paid. However, they are getting more comfortable with offering incentives and acting when payments are delayed.
For example, up-front deposits are on the rise: 37% often or always get a deposit, a 30% increase from 2019. Payment incentives are being offered by 49% of respondents: 11% offer discounts for early payment, 23% use late payment interest or fees, and 15% use both.
Companies are also getting more comfortable with mechanics liens in 2021: 71% of construction businesses have filed a lien over non-payment — a 22% increase from 2019. This may be a result of the slow-down due to pandemic restrictions and the difficulty in processing payments when workers are working remotely from home.
Contractors and suppliers continue to be frustrated by the slowness of payments in the industry. All parties will continue to look for solutions that will improve cash flow in the construction industry.
If you would like to learn more about how you can benefit from connected accounting solutions, please contact Lockstep or visit us at www.lockstep.io.
About the Author
Justin Gitelman is the Content Coordinator at Levelset, where over 500,000 contractors and suppliers connect on a cloud-based platform to make payment processes stress-free. Levelset helps contractors and suppliers get payment under control, and sees a world where no one loses a night’s sleep over payment. For the latest payment stories and trends, please visit Levelset News.