When it comes to funding labor and material costs for any given construction project, contractors and subcontractors are often left with the greatest exposure. In a perfect world, invoices that reflect all work approved and completed to date are submitted in a timely manner and paid within the terms. Each party's cash flow remains balanced and work marches on.
Right? But what happens when payment for those invoices slows or stops altogether?
Slow payments cost the construction industry $64 billion in 2019, according to survey estimates from Rabbet Partners. The survey of 184 general and subcontractors across the United States showed slow payments had effects on their work and bottom lines.
- 30% of all respondents reported work had been delayed or stopped due to payment delays in the last 12 months
- 63% of subcontractors chose not to bid on a project due to a GC's or owner's reputation for slow payments
- 43% of subcontractors wait between 30 and 60 days for payment; 30% wait more than 60 days
- 72% of subcontractors would offer a discount for payments within 30 days
When owners and GC’s aren't timely in their payments, subcontractors may struggle to pay their suppliers, workers, and other overhead, and that can lead to devastating consequences.
Currently the actions companies can take through the life of a project are limited.
State laws can be a powerful tool if used correctly. Claims usually fall under breach of contract for nonpayment, unjust enrichment, or violation of the state’s prompt payment laws. Here are a few examples:
- Unjust enrichment claims can be used but are limited and no help if the general contractor has already been paid.
- States are also beginning to limit retainage on contractor payments.
- Many state laws have stringent interest provisions baked in.
Knowing the laws in the states where you do business is vital, but many of the solutions they offer still require significant time and weighty legal fees.
Negotiating the proper terms on the front-end can go a long way to eliminate potential future conflicts, but that is difficult because many of the legal clauses are industry standards. Pay When Paid, Paid if Paid and Retainage to name a few.
That leaves the mechanic lien, which is perhaps the most powerful tool. The fact that a lien is “hanging out there” may encourage payment but they are almost always a barrier in forming long term relationships and like other tools, typically are slow and expensive to resolve.
The use of construction technology is becoming more and more prevalent in the industry.
Here are a few examples of progress that has been made, but as you will see, that progress is limited.
- Automated notices on each project increases visibility and may get your payments prioritized.
- Automating your lien waiver process.
- Technology can make your invoices clear and concise and send them electronically.
- Technology can ensure you have the correct contacts and communicate reliably.
- Smart contracts.
For DigiBuild and blockchain technology, that is just the tip of the iceberg!
Blockchain allows faster payments by introducing a trusted communication network which removes many of the paperwork or “audit trail” requirements that slow things done. Some perks of construction blockchain technology:
- Tie payments to a BIM loaded platform that is guaranteed trustworthy. Progress payments and work in place becomes much more accurate.
- Payments can be “streamed” directly from a lender or owner with payments happening instantaneously (think how you can stream Netflix to watch a movie immediately).
- Automate much of the manual processing required in the current “Net 30 or Net 60” draw schedules.
Make no mistake, blockchain construction technology has arrived, offering immense opportunity for the construction industry to become more effective, transparent, productive and sustainable...the Perfect World.
Click here to schedule a talk with one of our team members, or to be included in our feedback process that goes toward making DigiBuild the biggest and best blockchain enabled construction software on the market.