Slow pay adds $40B a year to construction industry costs
- In its Construction Payment Report 2018, construction loan software provider Contract Simply revealed that late payments from customers cost the commercial construction industry $40 billion annually. This represents an add-on to total project costs of 3.3%.
- The study, conducted in partnership with bid procurement platform Building Connected and covering 1,300 respondents from a variety of trades, found that 88% of contractors wait longer than 30 days for payment and that 46% cover the gap with business or personal savings and credit lines, which result in extra financing fees. More than 80% of those contractors surveyed have filed mechanics' liens against a project in order to ensure they get the money owed to them, incurring unplanned legal expenses. Late payments to subcontractors also prohibit them from meeting their own payroll and invoice payment obligations.
- The study also revealed that 70% of contractors would be willing to discount their invoices in exchange for payment within 30 days, which would put an estimated $18 billion back in the pocket of builders, developers and lenders. Paying promptly can also ensure that developers and general contractors will be able to attract the best subcontractors in a time of labor shortages. In the report, Contract Simply suggested digital invoicing and payment solutions to speed up the payment process.
There are plenty of tools to expedite the payment process, and contract language can be modified to make it clear when payment is due, but those solutions work only if everyone is willing and able to pay. In those cases where payment is not forthcoming due to reasons other than not being able to navigate the process, there are other steps contractors can take to recover their money.
As the Contract Simply study indicated, filing a mechanic's lien against a private project is a way to ensure payment, although it is typically not a quick solution and can create tension between all parties. The statutory requirements that allow contractors to preserve their lien rights vary from state to state, but they usually involve the timely filing of specific notices throughout the various stages of the project and then throughout the lien process. The effect of a lien is similar to that of a mortgage. It is a public record that lets everyone know — the owner, lenders, potential buyers — that there is an encumbrance on the property.
If the general contractor has furnished a payment bond for the project, then subcontractors can also seek payment from the surety company that issued the bond. The surety company is required to make good on valid claims if the bondholder cannot pay.
- Contract Simply Contract Simply Uncovers $40 Billion of Excess Costs in Construction Industry
- Contract Simply 2018 Construction Payments Report
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