How lenders and developers spend excessive time processing draws on construction projects, the inefficiencies inherent in current processes, and why embracing technology is crucial for streamlining operations and driving future success.
REPORT: THE $208B COST OF SLOW PAYMENTS TO THE CONSTRUCTION INDUSTRY
Timely payments to general contractors and subcontractors reduce project risk, added costs, and delays. Rabbet’s 2022 Construction Payments Report dives into what happens when those payments don’t arrive on time and why it’s the responsibility of all parties involved to reduce these payment bottlenecks.
Rabbet conducts an annual survey of subcontractors and general contractors about the speed of payments in the construction industry. That information is then analyzed for the impact on cost for contractors, developers, lenders, equity partners and stakeholders within CRE.
This year, 137 general contractors and subcontractors across the US contributed their voice to issues like managing working capital, bidding decisions, and evaluating project risks in the face of slow payments during the last 12 months.
This year’s report compares survey data from this year 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.
Cash flows out of a contracting business for wages and materials much quicker than the time it takes for cash to flow in. This process can impact bidding from general contractors and subcontractors. 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.
Summary of Survey Highlights
- $211B the cost of slow payments to the US construction industry
- 37% of all respondents report that work has been delayed or stopped due to a delay in payments to crew members in the last 12 months
- 44 hours per month general contractors spend managing payments to subs and vendors
- 90% of general contractors surveyed see the value in paying their subcontractors faster
- 62% of general contractors have incurred billing charges, financing charges, or other costs when floating payments to others in the last 12 months
- 8.5x increase in general contractors using retirement savings to float payments for their business
The Real Cost of Slow Payments for Subcontractors and General Contractors In 2022 an estimated 49% of contractors reported that they wait longer than 30 days to receive payment. This is unchanged from 2021 data that shows an estimated 50% of contractors claiming they waited longer than 30 days to receive payment.
62% of general contractors incurred financing costs while floating payments to subcontractors, a minimal change from 63% in 2021 and 65% in 2020.
Cash flows outwardly for subcontractors and general contractors before payments for their services are ever received. Because of this, they must include enough capital in their bids to account for overhead. Now, 93% of subcontractors claim they are at least somewhat confident that they have included enough overhead costs.
Slow Payments Materially Impacted Project Returns In 2022
By every measure—schedule, cost, and risk—slow payments were 30% more expensive in 2022 due to inflation and rising interest rates.
37% Subcontractors report work was delayed or stopped due to a delay in payments in the last 12 months (28% in 2021)
27% Subcontractors report filing a lien due to slow payments in the last 12 months (17% in 2021)
Added 12% to overall project costs
The Implications of Slow Payments
This survey asked both general contractors and subcontractors what they felt like the biggest contributor to project delays is. Their answers varied but the top three answers were:
- Workforce shortage: trouble finding labor
- Materials concerns: supply chain issues and rising materials costs
- Payment processes: the speed of payments and the overall payment process needs to be streamlined
The Cost of Inflation on Construction 15 Report Takeaways
Because inflation can directly impact how general contractors and subcontractors bid on projects and plan ahead, this survey sought to understand how inflation will impact bidding strategies on projects and how confident they were that their business model will survive the next 12 months.
Both subcontractors and general contractors claimed their bidding strategy has shifted to account for the changing environment. Many respondents claimed they were choosing to bid more carefully and doing more extensive research before submitting bids because rising costs have cut into profitability. Additionally, some contractors are choosing to boost their bids anywhere from 5-10% to help absorb some of the additional costs. One respondent claimed that inflation has caused them to charge more for jobs because of rising cost for labor, and supplies. While another stated that they have had to be pickier when selecting bids to take into account the increased prices of labor and supplies.
The answers were across the board when asked how confident they were that their bidding strategies would cause them to survive the next 12 months. Of course, some mentioned they were nervous and that business has declined, but the large majority of respondents felt confident that with proper management and established business they will survive the current economic environment.
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.