Each year Rabbet conducts a survey of subcontractors and general contractors about the speed of payments in the construction industry and analyzes the impact on cost for contractors, developers, lenders, equity partners and stakeholders within CRE. We then create our annual Construction Payments Report from the findings of this survey.
The survey that this report is centered around captured how 94 general contractors and subcontractors across the US managed working capital, bidding decisions, and project risks in the face of slow payments during the last 12 months. The goal of this report is for construction lenders and real estate developers to understand why all parties in the construction industry should take action to address the longstanding struggles of slow payments in the US Construction Industry.
This year’s report compares survey data from 2021 with data collected in previous years to examine the accelerating cost of slow payments for the industry as a whole as well as demonstrates the primary and secondary cost of slow payments.
Here is a summary of this year’s report.
The Hidden $136B Cost of Slow Payments in 2021
Because business expenses are incurred and must be paid before payments are received for work conducted, working capital is crucial to contracting businesses.
Subcontractors indicate that the value of faster payments is greater than the value of alleviating financing costs.
To finance slow payments, the estimated overhead included in subcontractors’ bids is 2.75% and 5.81% for general contractors. This year’s report uncovered that slow payments to subcontractors and general contractors will create $136B in additional costs for the US Construction Industry in 2021. This staggering number is 36% higher than the $100B impact of slow payments in 2020. Process inefficiencies heavily contribute to this total.
- 67% of subcontractors report choosing not to bid on a project due to a general contractor or owner’s reputation of slow payments
- 86% of general contractors agree that delays in payment directly affect project deadlines.
- 83% of subcontractors claim that late payments from a general contractor affects productivity
- 74% of general contractors have had to pay more for labor or charge more for labor to meet a project deadline in the last 12 months.
- 72% of subcontractors would offer a discount in exchange for payments within 30 days
Better Payment Reputation, Better Pricing
An owner’s reputation for slow payments threatens the general contractor’s ability to earn competitive bids. 67% of subcontractors claimed they’ve chosen NOT to bid on a project because of a general contractor or owner’s reputation of slow payments. 83% of subcontractor respondents claimed a late payment had an affect on their crew’s productivity to some degree.
The communication, expectations, and relationships between general contractors and subcontractors can directly impact a crew’s productivity which would then influence project timelines and overall quality of work.
Covid-19’s Construction Cash Flow Consequences
Subcontractors and general contractors have long been carrying the burden of slow payments—and all stakeholders suffer from the costs.
Respondents were asked which of these factors, if any, have negatively impacted cash flow over the last year. More than 74% answered that increased material costs negatively impacted cash flow the most followed by longer material lead time (47%), covid restrictions (47%), finding labor (42%), and finally increased labor costs (40%).
When asked which of these factors, if any, prevented bidding on a project over the last 12 months, 40% of subcontractors and general contractors claimed that increased labor costs and increased materials costs prevented bids.
The Unintended Risk of Slow Payments
Expediting payments is a critical component of risk management. Rabbet’s Annual Construction Payments Report shows how slow payments as a result of inefficient payment processes can derail projects and continue to add unnecessary risk in the form of liens, project delays, and unforeseen costs.
Floating payments is not solely a subcontractor problem. When anyone in the process suffers from delayed payments, others in the payment cycle are inevitably affected.
86% of general contractors agree that delays in payment directly affect project deadlines. The pandemic, like in most industries, illuminated the need for contingency plans and efficient processes that can adapt to unexpected circumstances. Though the problem is now recognized, the construction industry has been slow to adapt to technology and process improvements that could enhance the payment process for lenders and developers and ultimately build a more copacetic and reliable relationship with general contractors and subcontractors.
Slow payments are an industry-wide problem that requires an industry-wide solution. It is crucial for industry participants to work together to eliminate the manual, complicated processes involved in invoice approval and payment distribution.
To learn more about how slow payments are impacting the US construction industry, download the full report here.
If you’d like to learn more about how Rabbet helps lenders and developers optimize their processes to reduce risk and potential delays in payment speed, schedule a meeting or demo with our team here.