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

Nicholas Johnson

PART II

They say you don’t know what you don’t know.  And they are right!

Recently I wrote an article about the problem of slow payments in the construction industry.  Construction Payments: Turning a Negative into a Positive)   I got a lot of good feedback, and thankfully many messages from people who wanted to know more.  What I did not know at the time was that our team at Trimble PPM had also been dialoguing on this issue with several of our e-Builder client-partners.  There were emails and posts and calls, and the result was that last November Trimble PPM hosted a webinar based on the same Construction Dive article which inspired had me to contribute.  If you are interested, spend a few minutes with capital project executives Gary Younger from Northeastern University and Tony DiTolve from the University of Virginia.  These guys validate the problem and discuss how they used technology to solve it at their respective universities.    (See SPEED MATTERS: Reduce Payments from Months to Days )

Back to what you don’t know, or humbly, what I didn’t know.  I knew this was a big problem.  It makes sense.  We use terms like “Project Team” and “Collaborative Partnership” when we discuss the individuals and individual companies who work to make a project happen.   If the individual contractors, consultants, vendors, etc. are being harmed that means the team is being harmed and ultimately the project is harmed.  What I did not know is that his problem has been quantified to the tune of 64 Billion Dollars.   That’s billion with a capital B!  What I did not know is that the average time it takes an owner to pay a contractor is 51 days.  And that is, generally speaking, 21 days late by agreement.  So owners are spending $64 Billion on fines and interest.  $64 Billion that did not buy a single material line item nor pay for a single hour of labor.  $64 Billion worth of nothing.

What I knew was that contractors and their subs can be selective about what they bid during good market cycles.  What I never thought of was that for public owners like UVA the requirement to select a diverse team (MBE, WBE, etc.) gets even trickier if the owner has a reputation for slow-pay.  This problem is also intensified for a large owner in a smaller city with fewer contractors present.  What I never thought of was that owners don’t just want the best contractor, they want the best project team and site superintendent inside that contractor’s organization.  And these individuals also have some say in which owner they work for. 

What I did not know, or what I failed to recognize, is that owners are really the ones who suffer the ultimate burden of slow pay.  I reported in the previous article…

“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.”

While this statement is true it neglects an equally important fact.  Let’s put it this way; Subcontractors and Vendors finance this $64 billion problem, but owners are the ones who must pay for the problem.

The obvious conclusion is this:  Construction owners must own this problem.  They must own the challenge of correcting it.  Or else they must continue to use precious capital dollars to buy nothing.

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Click here to learn more about how NEU and UVA solved this problem once and for all.

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Construction Payments: Turning a Negative into a Positive

Nicholas Johnson, Business Executive for Higher Ed at e-Builder: His take on how speed matters.