Construction Payments: Turning a Negative into a Positive

Nicholas Johnson, Business Executive for Higher Ed

A recent article published by ConstructionDive.com, “The Dotted Line: How to get payment from slow-paying general contractors”, highlights the real-world problem of slow-pay in the construction industry. It focuses on ways a subcontractor can protect itself against the harm caused by slow-pay. Remedies include placing liens on projects, an idea no one wants to use.  Nathan Budde, chief legal officer and general counsel at Levelset is quoted,

“(a) lien is the most powerful collection tool, but it's not necessarily the only tool. (It) is really the nuclear option. Nobody really wants to be in a position where they have to file it, and once it gets filed… it's not beneficial to the relationship between the sub and the general contractor, the general contractor and the owner or the sub and the owner.”

Generally speaking the subcontractor and its suppliers bear the bulk of the burden of slow-pay, as the parties furthest from the source of money, the owner. They are the first to extend their own capital, the first to put their cash-flow at risk. But each part of an economic cycle shifts leverage back and forth from owner to contractor to a subcontractor, and vice versa.  For the last several years subs have plenty of jobs to bid on and have been more selective about the terms under which they bid.  Our team at e-Builder has observed on many occasions incidences of high-quality subs choosing not to bid on local government work because the particular government agencies have reputations for paying very slowly. At e-Builder our efforts are concentrated on helping owners solve problems like this. And our owner partners, public and private, have found a way to flip this equation.

In this particular case, the problem of slow-pay, we enable our owners to put project controls into place that automates the flow of information, makes all pertinent data available instantly, and prompt timely responses. The result is an incredible improvement in performance. The Pennsylvania Prompt Pay Act requires payments to be made within 45 days. Despite this, the Pittsburgh Water and Sewer Authority struggled with this issue, and it often costs them in fines and interest penalties. After implementing e-Builder they reduced pay app processing to vendors from 45 days to 25 days, and for contractors from 50 days to 20 days. Another owner in the healthcare sector recently reported reducing the time they took to process an invoice from 171 days down to 30.  In fact, this same owner then began asking for a 1% discount on invoices in exchange for early payment.  Another healthcare owner now offers Net15 payment terms in exchange for a similar discount. Not only have subs and GC’s often reduced their invoice values, the owner’s subsequent projects have seen more bidders. It seems good news travels fast in our industry.

If reducing fines and interest paid is of interest to your capital project team, or if potentially reducing the value of every invoice by a percentage would help fulfill your mandate to do more with less, perhaps it is time to make improving your project management tool set a top priority.  

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Construction Payments: Turning a Negative into a Positive - Part II

Continuing the conversation about the impact late payments have in the construction industry, Nicholas Johs...

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