Do Payments Slow as the Economy Slows?

Economy Payment Slow Blog Post

Everyone has concerns when the economic outlook isn’t as good as it could be – or has been. These concerns can be exacerbated during the current pandemic as rules and restrictions surrounding employment, ongoing operations and government assistance continue to change.

Developments are, by their very nature, already in an ever-changing state as progress is made, changes are requested, and budgets and timelines remain impermanent…no matter how much we fight against it. This current downturn has also conjured up memories of the Great Recession for many. That was a particularly difficult time for lenders, developers and general contractors. One most would surely like to forget. But you know what they say about history…

These factors, combined with the fact that pandemics don’t operate on anyone’s timeline, have caused many in the construction finance industry to wonder what all this may mean to their outstanding payments. Will lenders still feel secure lending? Can developers weather a down period and still proceed with their current projects? Will general contractors be able to pay their employees and subcontractors?

Regardless of what form the question takes, the primary concern for construction finance right now boils down to one thing: money. Or a lack thereof.

Funding Becomes Conservative

Unfortunately, just like people, companies tend to tighten their wallets when times get lean. For the construction finance industry, this notion takes on a few forms:

  • Lenders may become more diligent in their underwriting, which may prolong the application and disbursement processes
  • Developers may preserve capital by delaying or canceling projects or job requests
  • General contractors may take longer to pay their workers and subcontractors if funding is delayed from the top

In addition to the corporate headwinds each party may face, projects in general may be saddled with:

  • Increasing construction costs
  • Labor shortages
  • Delayed materials, especially form overseas

And don’t forget the added complications from COVID-19, which can include:

  • Mandated construction stops
  • Stay-at-home orders
  • Social distance requirements
  • Reduced maximum capacities
  • Closed offices
  • Sick Workers
  •  Workers who don’t show up to the job site for fear of contracting the virus
  • Delayed PPP (Paycheck Protection Program) payments
  • Employees and project partners working from home…many while homeschooling their children

All of these factors do have the propensity to delay payments, perhaps more so than during past downturns. Plus, shuttered offices and employees working from home means not everyone has access to the same systems, files and authorizations they did back at work. Development delays can also be exacerbated if county offices are closed.

Delays Occur

Regardless of their cause, we all know what project delays mean: delayed payments. This issue can easily become insurmountable if businesses are already stretched too thin. In fact, Rabbet’s 2020 Construction Payments Report noted 43 percent of subcontractors waited between 30 and 60 days for payment as the construction industry suffered from 51 days’ sales outstanding. And that was when the economy was at its strongest.

What You Can Do

Knowing payments may slow is one thing. Taking an active approach to minimize the impact on your business is another.

While you may never be able to completely stave off the possibility of a payment delay, these steps can ease the burden and stresses that come with this occupational hazard.

Communicate – staying in close contact with project decision-makers, including the personnel responsible for disbursing payment at the lender, developer and/or general contractor levels – can minimize surprises down the road. Communication also extends to your team. Be sure you know who is working and from where. The job site should also be closely monitored to ensure there are minimal disruptions (within reason) to the project.

Automate – it’s easy for tasks and invoices to get lost in the shuffle. Throw in a worldwide pandemic, and it’s practically expected. Take the stress off of everyone by using an intelligent construction finance software like Rabbet. These programs can reduce manual data entry, generate reports, and keep your project on track. Payment management is a lot simpler when all project-related documents are stored in one streamlined location.

Prepare no one is saying a general contractor should give a notice provision the second they suspect a payment may be a few days late. What is helpful, however, is knowing your rights and what steps you can take if a payment becomes delinquent or altogether unlikely. This may include issuing a preliminary notice or intent to lien notice, or filing a mechanic’s lien. You should also review force majeure and delay provisions (if applicable) in your contract. And don’t forget to pay close attention to deadlines as your window of opportunity for, say, filing a lien may pass you by if you’re not careful.

Observe – construction finance is built on relationships and reputation. These are two critical factors when it comes to choosing project partners in the first place. Many businesses work with lenders, developers, general contractors and subcontractors that they’ve developed a working relationship with over time. Use that history to your advantage. If you see a sudden delay in payments, problems processing payments or shifts within their own organizations, it may be time to have a talk. It’s always easier to address a problem before it spirals out of control, so set up a meeting at the first signs of trouble. On that note, pay close attention to reputation. If a company is known for dragging out payments or stiffing vendors, it’s probably better to steer clear.

Preserve you may not be able to prevent payment delays to you, but you can minimize their impacts on your business by preserving capital when times are tough. In other words, get lean. Trim expenses where you can, including work lunches, topping out parties and investments in anything that won’t instantly improve your bottom line. One investment that can is automation. Smart equipment and intelligent software can save you tons in manual labor and human errors. Lines of credit and/or refinancing debt can also help you wait out delayed payments, though these options should be used sparingly.

No one likes the thought of payment delays, especially in a downturn when everyone is worried about their project prospects and paychecks. While you can’t always prevent these things from happening to you, you can take some steps to minimize their likelihood. Efficient technology like Rabbet’s construction finance software can help you and your team ensure payments aren’t delayed due to approvals, paperwork, or manual processes. Schedule a demo today.