Payment Problems in the Construction Industry
And how to build better payment systems, brick by brick.
From the half-built complex down the street to the unfinished bathroom upstairs—anyone who’s ever tackled a construction project knows the process is unpredictable. It’s filled with variables, pitfalls, and problems—all things property owners typically dread—and it can easily get out of control. That’s why it’s essential to control what you can: your payments.
With supply chain issues, labor shortages, and recession pricing, it’s more important than ever to have a solid payment process that’s fast, secure, easy and in line with industry payment terms without putting pressure on all types of business owners. You need a payment solution that works how you work.
We know that changing the way you pay, get paid, and how you keep track of both can be daunting—not to mention understanding the ins and outs of contractor payment schedules, construction industry security, or the odd contractor payment term—but that's ok. We’re here to make the hard stuff easy. We’ll show you some common problems with building and construction industry payments, how each kind affects your bottom line, and what you can do to fix them.
The Hard Stuff
It’s a payment reality of the construction business that residential and commercial building firms are often strapped for cash or have fundamental cash flow issues. This often comes down to the speed of payments and lenient payment policy. For “pay-when-paid” models – late or delayed payments ripple through general contractors, construction companies and suppliers alike, bogging down the business and affecting everyone’s cash flow and bottom line.
Construction loan software provider Rabbet, formerly Contract Simply, estimates in its Construction Payment Report 2018 that slow or delayed payments add roughly 3.3% in total add-on project costs. This amounts to a staggering $40 billion spread across the entire construction industry each year, simply caused by delays in making payments or getting paid for completed work.
It makes sense when you think about it. When your general contractor and their subs aren’t getting paid promptly, they can’t work for you. When your supplier isn’t getting paid by the due date or is getting late payments, they can’t give you the things you need to do the job. When you’re not receiving payment on or before the due date, neither is any other party. The payment timeline gets lengthened, construction contracts suffer and costs go up. Suddenly, a down payment is no longer enough, the property owner gets impatient, the agreed upon price and the final payment change. It’s a vicious cycle that makes keeping pace difficult for everyone.
How often money changes hands—and in what intervals—can noticeably affect the price of goods and services on construction projects within the industry. While most suppliers are paid a lump sum up front for materials, contractors and construction firms typically aren’t paid until the construction work is complete. For obvious reasons, this can cause cash flow problems that contribute to escalating costs.
It's a difficult position; you’ve signed a contract and laid out good money to get started. Now the money has stopped moving, even when business is booming. What happens if you’re on the hook for more costs— extra materials, interest payments and/or equipment rental? Do you continue to pay on time and meet the payment schedule, hoping you recoup?
It may leave you asking yourself if the holes you’re digging are physical or financial.
When time is of the essence, efficiency is key. Of course, the old ways may be best when it comes to building something that lasts, but it’s the old ways that will inevitably bring your payment processing tumbling down. Paper payments and manual record keeping have long been the standard in the construction industry. However, these ledger-loving, labor-intensive payment systems eat time and manpower, slowing your payment schedule and raising the total cost for both you and the client in the long run.
Not only are they slow, but they’re also inaccurate. Human error is about the only thing you can count on for even the best business’s bookkeeping. In an industry where keeping construction project costs at a minimum is top priority, every cent counts. Little mistakes can make or break even the biggest business. Simple clerical errors, while innocent on the surface, can grow to mean the difference between a dollar and a dime—or worse yet, here today and gone tomorrow.
The good news is—unlike resolving payment disputes, understanding construction contracts, getting an adjudication determination, or explaining construction industry payment terms to a novice—mending what’s broken is no sweat.
The Easy Fix
Modernizing your payment system is the easiest way to optimize your cash flow. Clients want flexibility—be that the option to use cash or credit accounts to send immediate payment, change their payment method from one month to the next, or make payments through various channels (in-person, online, or via their mobile device). Today’s payment platforms offer that and more, making it possible to send, invoice and accept payments instantly anytime and anywhere.
Fast invoicing, fast payments, and effective payment processing work to keep your costs in check and keep construction project totals from skyrocketing. When this trio is tightly in sync, money comes and goes seamlessly, just as it should. You stay on good terms with suppliers, general contractors, and clients, and you can focus on the job you were really hired to do, not be stuck behind a desk reading through contract terms, making phone calls over a late independent contractor payment or trying desperately to get a payment response.
Progress payments alleviate the unwanted headaches brought about by the pay-when-paid model in most contracts. Billing in installments at pre-defined stages of work (when following an agreed upon payment schedule and fixed price) helps manage time, corral project costs and ensure that money stays moving. It works almost like a deposit. Write this regular deposit amount into your construction contract and fresh capital comes in continually, your customers paid early instead of late, projects stay appropriately funded at every step of process and, if you do it right, there’s money left over to invest in growth.
Think about it; start a new project as you’re finishing the old one. Bill, get a progress payment for that and generate more capital. Put that capital towards new materials and meet contractor payment terms. Now, do it all again and the tap is really flowing. Worksites are humming, project owners are more efficient, property owners are more satisfied and, as a result, your business is flourishing. All because you made the right money moves.
With more billing comes more accounting. This is where it pays to have a well-oiled payment system at your back. A good payment system will automatically track your accounts payable and receivable. It can update balances in real time, send out speedy and prompt invoices, enforce payment, manage and catalog incoming payments instantly, and handle basic client communications like payment reminders and confirmation. It can also handle the intricacies associated with construction industry payment terms—be it managing multiple payment schedules, taking a large up-front payment, issuing a payment claim, or handling other not so common contractor payment terms.
An established payment processor that knows and understands the building and construction industry can also improve your visibility. They play a big part in winning that new construction contract or attracting new clients who may, at one time, have been skeptical or worried that they might not get paid in a reasonable timeframe. They can reinforce trust in you and your business by maintaining industry security of payment, lessening the hesitation that can lead to slow scheduled payments or, even worse, a late payment that might violate the terms of your contract or cause a payment dispute.
Many of these specialized payment software solutions can also integrate with other industry systems. This comprehensive approach to financial connectivity goes a long way to minimizing payment processing time across various channels, creating a strong and dependable revenue stream that’s ready to go as fast are you are.
To learn more about the nuts and bolts of better payment processing in the building and construction industry, visit our Construction & Contractor Payment Processing Solutions center. There, you'll have access to expert support available 24/7, 365, via email, phone, or online chat. And when you're ready to seek professional advice on how to get your money moving in real time, talk to the hardware heads at Business Payment Processing Solutions & Services. They'll set you up with the tools you need to do the job right.