Contractor lamenting construction cash flow problems with downward error

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If your company is feeling the pinch from construction cash flow problems caused by slow payments from customers, you certainly aren’t alone. Construction companies are looking to expand their businesses and take on larger projects, and they’re struggling because they don’t have the cash to do it. This causes stress for everyone involved.

The good news is, there are some things contractors can do to speed up payments so they can grow their businesses.

Subcontractors aren’t getting paid

A recent survey by Billd showed that 62% of subcontractors are seeking larger projects, and 44% want to fund this expansion with cash on hand. They don’t want to take out a loan or increase their debt to grow their business.

However, 46% struggle with cash flow. This seems to be due mostly to the fact that subs often pay for materials before they receive payment from their customer (63%). This gap between making a payment for materials and getting paid creates a negative cash flow for subs.

In Levelset’s recent payment survey of general contractors, subcontractors, and suppliers, 97% said they experience stress over slow payments and cash flow problems. That’s almost everyone who responded to the survey!

We also found a gap in payments to suppliers and receipt of payment from customers: 70% pay their suppliers within 40 days of purchase, but only 49% get paid within 40 days by their customers. How are they filling this gap? 70% of respondents use some form of credit to pay for materials, whether it’s trade credit, credit cards, or loans.

Speeding up payments from customers is a low-cost way to improve cash flow and use less credit.

What are contractors doing?

Contractors have been more proactive in protecting their payment rights and using mechanic’s liens to collect payment. Our survey showed that 77% are sending preliminary notices on projects. 23% said they send them on every job, whether it’s required or not. Sending a preliminary notice lets the owner and general contractor know you’re on the project and are expecting payment.

Unfortunately, 75% have had to file a lien in order to collect unpaid monies. In the past year, 55% filed at least one lien. And 33% have had to foreclose on a lien in order to collect payment. Contractors are taking advantage of their statutory right to file a mechanics lien and collect. However, filing a lien and a lawsuit to collect can be expensive. Many contractors are looking for other ways to speed up payments.

How to speed up construction payments

In the Levelset survey, respondents said that the five main factors contributing to slow payment were:

  1. Project financing problems
  2. Poor communication
  3. Poor management by GC
  4. Poor invoicing process
  5. Poor follow-up

While some of the factors are out of a contractor’s control — like project financing and GC management — there are some things subs can do to increase the chance they’ll get paid sooner.

1. Improve communication

Contractors who send preliminary notices on every job, whether required or not, tend to get paid faster than those who don’t send a notice.

Why? Because the owner and GC don’t want a lien on the project, so they pay the companies that sent notices first to avoid any further action.

2. Improve or set up an invoicing process

If contractors aren’t invoicing on a consistent basis with a consistent process, it’s easy for required documents and other items to get lost in the shuffle. By detailing a step-by-step process for invoicing customers and ensuring that all the documents required are collected and turned in, subcontractors can get paid faster, because the GC has everything they need.

3. Follow-up

Contractors should have a collection policy that details the timing of follow-up messages to ensure that customers have the invoice and there are no issues with it. By regularly following up on invoices to ensure they’ve been received, the paperwork is in line, and there’s no reason for delay, subs eliminate many of the problems that can cause payment delays.

4. Adopt electronic payments

Subcontractors who accept electronic payments tend to get paid faster. Electronic payments are convenient for their customers and there’s less chance the funds will get lost, unlike a check in the mail. The Levelset survey shows 83% say they currently have the ability to accept electronic payments, and nearly 80% of those say that it has helped their company get paid faster. Whether by ACH, wire transfer, PayPal, or credit card, the ability to accept electronic payments is helping many contractors get paid sooner.

Beat construction cash flow problems with faster payment

The lesson learned from these studies seems to be that contractors have a cash flow problem caused by slow payments from their customers.

Anything contractors can do to make payments easier — like accepting electronic payments — can help speed up the payment process, giving them the cash they need to expand their business. Otherwise, contractors can rely on protecting their mechanics lien rights, by sending preliminary notices and following up regularly.

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