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Getting Paid in Construction is Like a Marathon in Hell

Posted January 7th, 2022

Construction payments are notoriously slow. There are a lot of misperceptions about why that is. Raise your hand if either of these statements sounds familiar.

“General contractors NEVER pay on time.”

“Subcontractors are terrible with money.”

Of course you have; they are two of the most common complaints made in the construction industry. The trouble is that both of these statements over-simplify a complex issue and pin blame where it doesn’t really belong.

Why are subcontractors always chasing down payments? Why can’t GCs ever seem to pay on time?

Slow payments, of course.

Getting paid in construction is like trying to run a marathon where the road is pocked with potholes and carpeted in broken glass. It is an arduous, uncertain journey that starts at the bid and ends . . . whenever (if ever) the subcontractors finally get paid. And retainage—that’s a whole other conversation!

Our industry is just starting to talk about slow payments. It’s about time. If we can change the conversation from the cliched stereotypes about irresponsible Subcontractors and miserly General Contractors, we can instead focus on solving the actual problem.

The Reality Behind Slow Payments in Construction

It’s no secret that construction has the slowest payment timelines of any industry. Levelset’s 2019 National Construction Payments Report detailed that about half of all US contractors do not get paid on time, with a staggering average wait of 83 days. The majority of those are subcontractors, who already operate on extremely tight profit margins. They also finance the bulk of the expenses in the early stages of a project.

On the flip side, the same report showed that most general contractors are paying their subs before they get paid by the owner. General contractors are putting their own business’s profitability at risk to cover payments to subs and suppliers because they aren’t paid on time, either.

A late payment doesn’t only impact one project. One late payment on a project can be the rolling stone that starts an avalanche — especially for subcontractors. Subcontractors often rely on the payment from job X to cover the mobilization costs on new project Y. If that money doesn’t show up, they scramble to find a funding solution. The results are often ugly. Desperate subcontractors grab quick cash from Merchant Cash Advances that end up bankrupting their business and ruining their lives.

Sound far-fetched? The 2018 Bloomberg series, Sign Here to Lose Everything, tells the story of Jerry Bush, a plumbing contractor who attempted suicide after MCA debt crushed his business. One of the lenders told Bush he would pursue him “until his death.”

Slow payments is a serious problem, impacting everyone in the industry. This is the battle cry our industry needs: We have to attack this together. We CAN solve it together. It will take technological advancements in construction finance, operational shifts within contractor companies, and collaboration between General Contractors and subcontractors. That’s right; you guys and gals need to get comfortable talking about cash flow on the project.

But first, let’s look at some of the ways technology is making it easier to get paid.

Getting Paid is Easier Online

The trouble with payment in construction starts with the process to simply request a payment. It’s a marathon of paperwork for the subcontractor, and that is only the first step. The financing on almost any construction job is like a precariously built Jenga tower of invested parties — including the General Contractor, developer, owner(s), lenders, and so on. A mistake in the paperwork chain at any point and the whole thing comes tumbling down.

The process is confusing, prone to failure, and entirely inefficient. Thankfully, there’s hope on the horizon.

Like many industries before ours, the digital transformation is solving some of these challenges. Levelset made waves when it secured $30 million in funding for its cloud-based SaaS company that allows contractors to quickly send a payment app or file a Mechanic’s Lien. On the financing side, Rabbet has created a streamlined, AI-driven construction draw process that makes it easier for lenders to receive, review and approve payments. We’ve undergone our own digital transformation at Mobilization Funding. We utilize digital solutions to make applying for funding, requesting disbursements, and making payments faster and more efficient.

But, technology hasn’t yet solved the subcontractor’s main dilemma. How do I finance 3 months of labor, equipment and materials on this job without a single payment from the job?

That’s where a good old-fashioned conversation can help.

Tear Down the Stereotypes

Before subcontractors and GCs can start talking about money, both sides need to adjust their perceptions of each other.

General Contractors — subs aren’t necessarily bad with money.

Subcontractors — the GC isn’t sitting on a stash of cash and delaying your payment out of malice or neglect.

Both of you were hired to do a job. Both of you are trying to do that job to the best of your team’s ability. Both of you are dealing with the constraints of the construction project, and You BOTH want to SUCCEED. So rather than butting heads over a situation neither of you is responsible for, why not work together?

Acknowledge Reality from the Start

Why wait until the first late payment to talk about what to do next? Subcontractors need to start talking about funding and payments in the bidding stage. Include late payment penalties (and early payment incentives) in your bidding contracts. When estimating your project costs, remember to include the cost of your funding. Because let’s be honest — you have to get funding from somewhere to float three months’ worth of labor, materials, equipment, and so on. Small Business Loan, Line of Credit, Mobilization Loan, “borrow” it from another project, MCA — Just kidding, please don’t take an MCA ever again — there is an associated cost. If you don’t build it into the bid in advance or you didn’t build it in at all, it will come out of your profit margin and you just might end doing the project for no profit at all.  In the case where you take out an MCA you most likely are doing the job to just give all your profit to the MCA lender in addition to ruining your company’s cash flow.

Create a Plan Together

General Contractors and Subcontractors need to sit at the table, put the numbers between them, and figure out how to complete the work at a profit margin that keeps both businesses growing and flourishing. Stop seeing each other as Customer/Vendor and start treating each other as what you really are: Partners.

You have a shared goal, remember: a successful project completed at a profit.

Talk honestly about contingency plans, incentive deals you can kick up to the owner, and discounts or credits you can leverage with suppliers. Build a strategy that reduces tension around money, ramps up collaborative success, and allows you both to focus on the performance of the project.

It is a long road ahead of us to solve the slow payment crisis in construction. It’s a marathon, but it doesn’t have to be hell on Earth. The first step is communication.

Now, go get paid.

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