This is the eighth in our series of posts on protecting the right to payment in the construction industry. I have recently seen a couple of blog posts highlighting a survey from late summer (Rabbet Partners and Procore; 2019 Construction Payments Report). The survey reported that the direct and indirect costs of slow payment to the construction industry for 2019 were estimated to exceed 60 billion dollars. That really brings the scale of payment issues into focus for the industry from top to bottom. Important players such as lenders and investors may be many layers removed from the nitty gritty of their projects and may not fully appreciate these impacts and what it can mean for their project investments. The survey results also fall right in line with the theme of this series of posts around protecting the rights to payment.
The survey pointed out that a company whose customers pay at 90 days typically would need up to 6 times as much cash to carry a project as the company with customers paying at 30 days. Consider that an average turnaround for a contractor’s invoice or payment application was from 50 to 75 days—but this was after up to several weeks involved in preparing and presenting the contractor’s monthly payment application. Meanwhile, the contractor’s cash needs don’t stop. Running out of cash for payroll and must-pay invoices is a major contributor to the subcontractor failures that can ripple through an entire project. For small contractors the issue can be existential.
The slow pay owner (or contractor) may not fully appreciate the risks that slow pay can present for the project as a whole. Apart from triggering subcontractor failure, the effects can be slowed deliveries of critical materials that the vendor will not release without payment. Delayed payrolls lead to layoffs of workers already in limited supply. Work can slow down or even stop in some critical corner of the job. In the longer term, slow payers probably will not be getting the best bids (or even any bids) going forward as subcontractors and suppliers price the costs of slow pay into their estimates.
If we couple this information about slow payers with the rising concerns about tariffs on construction materials, early signs of a coming recession, and the financial bubbles which have developed both in the US and abroad, it makes for a call to action. The construction industry, at all levels, needs to step back and look realistically at both the present and the probable future of construction and direct new attention and urgency to protecting payment rights and cash flow. Sixty billion dollars is simply too much “lost” value to ignore not counting the more day-to-day concerns of individual construction businesses. The state lien and bond laws exist for just this purpose—to protect the right to payment. But those laws are not self-executing. Most companies “know” what they need to do. They just need to focus more effectively on doing those things. Starting from awareness, they need to develop effective project information-gathering, including confirming the project financing. They need to be aware of the requirements of the lien and bond laws in the states where they are operating. They need to carefully observe the preliminary notice requirements for those states keeping in mind that some of those notices might be due within days of starting work. They also need to watch for the challenges of contingent payment language in contracts and they need to be sure to follow through to file lien or bond claims in those instances where it becomes necessary to protect payment.
Risk is inherent in construction but the risks to the right to payment can be managed with the right attention. The process of collecting payment starts at the beginning and not at the end of the project.