Slow Payment Puts Stress on Contractors, Creating Job Risks, Per New Payment Survey
Very frequently lenders view the contractor payment as simply part of the overall construction loan project, and not a chain of events that places payment stress on contractors and every stakeholder after them. New research from Levelset and Tsheets by Quickbooks shows that contractors struggle to get paid on jobs and the cash flow challenges stress their businesses and put jobs at risk. This new report surveyed over 500 construction professionals about construction payment challenges and found that half of the contractors do not get paid on time, 98% had to at least threaten a lien to get paid, and nearly everyone (75%+) desires more visibility into the payment process. To see the complete report of the findings, view the 2019 Construction Payment Report here.
It is well-known and accepted that the construction payment and loan draw process is complicated. The stress exerted on contractors should be alarming to lenders, developers, and other job stakeholders at the top of the payment chain, because payment stress puts jobs at risk.
Perhaps more alarming is how many compromises contractors must make in the payment process:
- At least 42% of contractors are paying their subcontractors and suppliers before they get paid
- More than half (55%) feel left in the dark about payment information on a job
- 61% never charge any interest on late payments, and 55% offer flexible payment options
- Although liens are frequently threatened, contractors fail to pull the trigger because they don’t want to lose a customer (41%), it’s too complicated (14%), or it’s too expensive (12%)
Contractors are stressed over cash, waiting a long time for payment, and making a lot of compromises
The Levelset and TSheets survey demonstrates that cash and payment struggles affect nearly every contractor, and managing these payment challenges is a day-to-day reality for them.
- Contractors don’t get paid on time and don’t get paid in full: About half of contractors in the United States reported that they frequently do not get paid on time. Almost 40% of contractors frequently do not get paid in full on every job, complaining that back charges, deductions, and other withholdings frequently get tacked on after the job is finished.
- Contractors are in a cash pinch: The slowness of payment in construction puts contractors in a serious bind. When asked how cash flow impacts their business, contractors reported that it prevented them from making payroll (21%) and caused them to raise prices (9%). Contractors also sometimes are dipping into their personal savings and credit to keep their business above water (34% of them!).
- Contractors always have their fingers on the trigger to lien the job: Nearly every contractor (98%) had to threaten a lien recently to get paid, and more than half (58%) had to file a mechanics lien to get paid. That’s a lot of risk for lenders!
It’s well known that construction payment is complicated and time-consuming. Coordinating the process is so challenging that it takes an average of 83 days to get money from Point A to Point B for engineering and construction industries (according to PWC annual cash flow survey). Lenders have an opportunity to increase transparency and efficiency as they hold the keys to certain pivotal points of the payment journey.
Jobs are at risk and lenders have the opportunity to look for ways to improve transparency in the process
When contractors are dipping into personal savings (34%), threatening mechanic lien filings (98%), and struggling to make payroll (21%)–then the likelihood of a massive failure that radiates across the job is only a matter of time. As all lenders have a vested interest in the success of every construction or renovation loan project, here are two opportunities for lenders to improve the status quo and protect these contractors who are a great referral source:
- Evaluate Contractors For Payment Behaviors: Lenders already know the importance of vetting the general contractor. And, as per this infographic on Contractor Vetting, it’s important to look at whether general contractors make habitually late or incomplete payments. But the bigger question is how to do this? How can you check on the payment history and payment problems experienced by general contractors? Slow payment and payment fires are too often hidden. New tools, like the Contractor Payment Profiles published by Levelset, enable Lenders to look up the payment history and practices of contractors. And to help you organize this, download Land Gorilla’s Contractor Acceptance Toolkit.
- Increase Transparency into Payment Process: 75% of contractors wish they had more visibility into the payment process, how others are being paid on the job, and what the payment terms are for others on the job. Contractors feel in the dark when it comes to payment. This turns into them engaging in disruptive behaviors, like threatening of filing a mechanics lien. Lenders can take actions to help contractors feel like they are getting a fair shake.
Technology provides transparency to contractors and builders
To alleviate contractors with a finger on the lien trigger, implement technology that allows for greater transparency and online touchpoints which saves time at all levels on the loan. Giving contractors a view into the payment or draw process and being able to see milestones helps manage expectations.
A clear view of payments is extremely helpful as contractors are trying to make informed decisions on all of their projects. Not only is visibility important, but being able to take action and request draws or change orders will greatly alleviate pain points contractors feel in the payment process. The customer experience is becoming more and more important, so offering the ability to complete tasks electronically and even providing esignature will make the payment and loan management process faster, safer, and more efficient.
The Construction Loan Manager from Land Gorilla not only takes manual and repetitive monitoring and tasks online, but we also connect with Levelset within the CLM to make the payment process even smoother.