Rabbet – the leading provider of construction finance software for commercial real estate developers, development service providers, construction lenders, and lender service providers, released the 2022 Construction Payments Report, with insights into the rapidly accelerating costs associated with slow payments in the construction industry. This is the 5th edition of this report.
This year’s edition uncovered how inflation impacts competitive bids from contractors, a jump in the overall cost of slow payments, and a spike in the reliance on retirement savings to float payments.
Based on a survey conducted in September 2022, general contractors and subcontractors estimate that the cost of floating payments for wages and invoices represents $208 billion in excess cost to the industry, a 53 percent increase from 2021. Findings indicate those costs are passed on to real estate developers and financiers in the form of project delays, added risk, and higher bids from contractors.
The rising inflationary environment coupled with climbing interest rates have direct and indirect impacts on schedule, cost, and risk for the entire construction industry. These takeaways suggest that industry is beginning to prepare for this economic shift.
Soaring materials costs hike project risk.
Rising material costs is the biggest factor preventing bids for the second year in a row. Supply chain issues which cause scarcity and timeline delays along with inflation continue to drive up materials cost. This can cut into profits as well as increase the total project cost.
Money is getting more expensive.
Inflation is a major concern for general contractors and subcontractors as money itself becomes more expensive. The current inflationary environment coupled with rising interest rates has made construction more expensive and the money needed to fuel construction more expensive. In 2021 we reported the cost of slow payments to the industry was $136B. Today, that number stands at $211B. Though the 55% jump from $136B is significant, it is not surprising when factoring in this current state of the industry. Now more than ever, the value of faster and more reliable payments to general contractors and subcontractors is critical.
The cost – and implications – of slow payments continues to climb.
As the industry grows, so does the cost of slow payments. A growing construction industry is seemingly a good thing. But, as highlighted in this report and Rabbet’s annual State of Construction Finance Report, this industry is plagued with antiquated and disjointed processes that make it difficult for parties to track and collect payments in a timely manner. As the industry grows, so will the risk associated with these serious process problems, bottlenecks, and decentralized payment structures.
Spiked use of retirement savings to float payments.
General contractors reported using their retirement savings to float payments to their business 8.5x more often than in 2021 and subcontractors are relying on their retirement savings almost 2x more often than last year. Though this is a notable jump, respondents claim that credit cards are still the predominant method employed by both general contractors and subcontractors this year.
This year’s report data remained aligned with last year’s in many ways. The areas where the data shifted; however, seemed to be mostly related to the current economic shifts in the US.
To view the complete 2022 Construction Payments Report, click here. For more information about Rabbet, visit rabbet.com.
Rabbet is transforming the construction finance industry with tailored solutions that provide the complete picture of real estate construction portfolios. Designed for real-time workflows and comprehensive insights, Rabbet enables real estate developers, lenders, investors and related service providers to lower operational costs, make more informed decisions, and earn trust with other financial stakeholders. Founded in Austin, TX in 2017, Rabbet has improved visibility and efficiency for over $40B in construction capital. For more information about Rabbet, visit rabbet.com.