Subcontractors appear to have a tenuous relationship with Textura’s Construction Payment Management (CPM) platform.
In 2012, for example, American Subcontractor Association members were “grip[ing]” about the product, which general contractors were forcing them to use and pay for. The gripes were so prolific they warranted ASA President Walter Bazan Jr. to write a letter to the membership in September 2012, and prompted the association’s “Executive Committee [to meet] with representatives from Textura…in an open and wide-ranging discussion” about the member complaints.
Two months later, this turned into Textura and the ASA announcing a “five-year agreement to educate subcontractors” and sponsorship, whereby the ASA got an on-going opportunity to represent its members’ interests and complaints to Textura, and Textura got a forum to court subcontractors.
The motivations for each of these parties are natural and the relationship continues to allow ASA to voice its members’ concerns.
Since Textura is a fact of business in the industry and used by thousands of subs, who also largely pay for the platform, a relationship makes sense. Nevertheless, as this article will explore, there may be some irreconcilable frictions between Textura’s CPM business model and the interests of subcontractors. These frictions threaten to cloak Textura’s courtship of subcontractors with suspect intentions.
Is Textura too Close to GCs to be a Friend of Subs?
Textura’s sales pipeline is full of the world’s biggest general contractors and property developers. And Textura’s business model counts on buy-in from these parties, who then mandate that subcontractors use, and pay for, the platform in order to get project payments.
Since subcontractors are the end users, Textura must give them some thought. Nevertheless, the inescapable reality is that owners and general contractors are Textura’s true customers.
How might this impact subcontractors?
Consider the following statement made in an article by one of Textura’s institutional investors, Goudy Park Capital, in response to Citron Research’s criticism of Textura’s stock (see: December 2013 – Wolf of Wall Street and September 2014 – The Fraud at Textura). Citron claimed that Textura is hiding “subcontractor churn” (i.e. the number of subcontractors who stop using the platform after becoming a user). In dismissing the argument, the Textura investor basically brushes off subcontractor (un)-happiness as irrelevant:
Citron doesn’t understand the business model – subcontractor churn number isn’t relevant as long as the GCs keep using Textura for their projects. The key takeaway from this is that Textura doesn’t need to spend sales & marketing dollars on the subcontractors – as long as the GCs agree, everyone is required to use Textura’s products. Subcontractors understand the model as well – when a GC looks at a new project, about 70-75% of the subcontractors have already used Textura before. Since the subcontractor is obliged to use the products, Textura also has significant pricing power as well. If a subcontractor is unhappy, the GC will just go to the next subcontractor down the line. [emphasis ours]
The payment process is an extremely sensitive area for general contractor and subcontractor relations, and it happens to be the area on which Textura’s CPM solution is focused. ASA President Brian Johnson stresses the significance of the payment process in the opening of his March 2015 President’s letter, stating that “[t]imeliness of payments from general contractors to their subcontractors is of great importance to ASA members.”
The payment process presents key risks to general contractors, and they have a specific perspective about those risks. And, likewise, subcontractors also have risks, and have their own specific perspective.
ENR’s Richard Korman highlights the friction caused by these divergent positions nicely in his summary of a discussion between GCs and Subcontractors during the publication’s annual Risk Summit.
In “Views Differ From Places on the Payment Flow-Chart,” Korman quotes a general contractor saying that “when trouble with a subcontractor arises…’the first question I ask is, how much money are you holding on that sub.’”
Will the product be built to provide protections for subcontractors…or to appease the risk appetite of general contractors and property owners? The opposite sentiment is echoed by subcontractors, who Korman quotes complaining about payment abuses and the practice of “staying ahead” of subs, saying that “[w]e must lead the industry kicking and screaming…to payment reform.”
Textura’s CPM product is built around the payment process, and while the platform is used, and ultimately paid for, by subcontractors, the Textura business development team is focused on selling it to a different audience: general contractors and property developers.
As stated by Textura’s own investors, the company “doesn’t need to spend sales & marketing dollars on the subcontractors…as long as the GCs agree, everyone is required to use” the products.
Given these facts, does Textura spend, or need to spend, product development dollars on subcontractor wishes? Will the product be built to provide protections for subcontractors and reform potential avenues for payment abuses? Or, instead, does it make more sense that Textura’s product is and will be built to appease the risk appetite of general contractors and property owners?
Why would Textura build its product to help subcontractors at all?
As the above-quoted investor mentions, the company has “significant pricing power,” and “if a subcontractor is unhappy, the GC will just go to the next subcontractor down the line.”
Analyzing Textura’s Value Proposition to Subcontractors
While Textura’s relationship with general contractors may ultimately be too close for the comfort of subcontractors, Textura is trying to change this position, and avoid that result. After all, a huge majority of its actual user base is comprised of subcontractors.
This explains why the company has reached out and worked with the American Subcontractor Association to become a platinum sponsor. Similarly, it explains why the ASA is entertaining the relationship, as the CPM platform is a fact of business for many subcontractors and there is value in establishing a dialogue.
Accordingly, CPM’s promotional literature stresses the existence of a value proposition for subcontractors.
The two main value propositions stated on the CPM website is that subcontractors who use the product will: (i) get paid faster; and (ii) stand out from the crowd. The next section of this post will analyze each in turn.
Alleged Value Proposition 1: Getting Paid Faster
Every subcontractor on the planet is interested in getting paid faster. Subcontractors face huge working capital challenges because of the industry’s traditional payment schedules, and this is intensified by general contractor risk shifting practices like pay when paid clauses, pay if paid clauses, onerous lien waiver agreements, and more.
To determine whether Textura’s CPM platform can truly help subcontractors get paid faster, one must analyze the causes of why subcontractors have a payment speed problem in the first place. Then it can be determined if Textura’s CPM platform offsets those problems.
The subcontractor’s payment woes begin with the construction contract arrangement, which requires the subcontractor to buy the supplies, provide the tools and equipment, pay for labor, and perform work before applying for payment. Then, after the work is in place and the subcontractor has spent its working capital, the subcontractor can apply for payment and wait the requisite “review and approval” period to get paid.
These components of the construction payment timeframe is responsible for a huge chunk of subcontractor payment delays, and Textura’s CPM doesn’t really do anything to change this timeframe. In fact, even the newly announced “Early Payment Program” appears to miss this upstream cause of problems, as expressed by ASA President Brian Johnson in his March 2015 letter to membership cautioning that Textura’s Early Payment Program “does not improve the approval timeline by the GC of a submitted subcontractor/supplier invoice.”
Subcontractors using CPM must still buy the supplies, provide the tools and equipment, pay for labor, and perform the work before ever applying for payment. And then, the subcontractor must still wait for the requisite “review and approval period.”
However, CPM’s “get paid faster” claim is not completely devoid of merit. Textura’s CPM platform is designed to streamline the process by enabling subcontractors to electronically make payment applications and exchange required documentation. This functionality addresses a secondary reason why subcontractors have a payment speed problem: the process of getting paid is paper-heavy, clunky, slow, and inefficient.
Textura’s value proposition is stronger in this respect.
When subcontractors, general contractors, and all other related users are proficiently using the platform, the exchange of documentation can happen faster, which ideally means that a few days can be shaved off the payment process.
With that said, however, the technology is a process-efficiency improvement for subcontractors and general contractors, not a game-changer. While the players may be more efficient, they are still playing by the same rules. It does not change the status quo; subcontractors are still financing the job, they are still shouldering the financial risk, and they still have to do all the work and then wait quite a while before payment comes through the door.
Alleged Value Proposition 2: Standing Out From The Crowd
The second alleged value proposition is really interesting because it has an unfortunate “negative” aspect.
According to the CPM website, subcontractors can “rise above the crowd and demonstrate that they are reliable, dependable…” by being on-board with Textura’s platform. However, does this value proposition instead infer that those who do not accept Textura’s platform won’t be considered? It calls to mind Goudy Park Capital’s comment that “if a subcontractor is unhappy, the GC will just go on to the next subcontractor down the line.”
Since Textura-GCs will require all of their subcontractors to use the Construction Payment Management platform, it’s intrinsically true that subcontractors who embrace the platform will “stand out from the crowd” against those who do not. They will be allowed to work on the project.
It’s not clear, however, how this translates outside the Textura eco-system, or how this is a value proposition specific to subcontractors.
Does Textura’s Lien Waiver Process Make it Easier for Subcontractors to Sign Unfair Lien Waivers?
Perhaps the function of Textura’s CPM product that provides the most relevant information to decide whether Textura is a friend or foe of subcontractors is the treatment of lien waivers.
Almost assuredly, the CPM’s most important feature is assisting general contractors in the collection of lien waivers from subcontractors. In fact, Textura claimed as much in their 2013 S-1/A filing with the Securities Exchange Commission, which states: “A key differentiator…[is the] ability to handle the generation and exchange of lien waiver…[which reduces] the risk of claims.” p. 83-84.
To subcontractors, Textura promises that it’s lien waiver exchange solution will “automate an inefficient manual process,” with the side-effect of speeding up the payment process and speeding up payments. To general contractors, the promise is that the lien waiver exchange solution will “reduce financial and legal exposure” and “claims.”
Determining whether Textura, at it’s core, is a friend or foe to subcontractors, therefore, may simply boil down to how Textura handles this sensitive exchange.
There have been a lot of posts here on the Construction Payment Blog about lien waivers, with a strong focus on how lien waivers themselves, and the lien waiver process as a whole, can be unfair. The construction industry is riddled by onerous, complex, insufficient, or over-reaching lien waiver forms that are simply unfair to subcontractors.
When subcontractors are asked to sign a lien waiver they are in a very vulnerable position. Short on working capital, they are asked to sign a document in exchange for cold, hard cash. Unscrupulous property developers, lenders, and general contractors can take advantage of this position and load lien waivers with tons of contract-altering provisions and expansive claim waivers.
Since the Construction Payment Management platform’s “key differentiator” is the lien waiver exchange process, one should question whether Textura insulates subcontractors against these unfair practices, or emboldens parties to attempt them?
Textura’s CPM does not regulate the lien waiver document. Since, Textura does not supply language, whether legally required or otherwise, Textura allows lien waivers exchanged through the CPM to say whatever the general contractor or owner wants them to say, and the CPM platform will blindly require subcontractors to sign them as a condition to getting paid.
This is perfect for general contractors, property developers, and lenders. It is especially perfect for these parties if they happen to have malicious intent – they can include any language desired in the lien waiver and use Textura’s CPM to force acceptance of the waiver before payment is made.
But what does this mean for subcontractors?
Is the lien waiver exchange process becoming more efficient and automated in a good way, or are the efficiencies and automations favoring the paying parties at the risk of the parties waiting to get paid?
Subcontractors Get Bullied Already. Is It Getting Easier or Harder?
At the ENR Risk Summit in 2013, subcontractors complained about payment abuses, stating strongly that “we need to lead the industry kicking and screaming to payment reform.”
The truth for subcontractors is that it’s easy for them to get leveraged. They have a tough position in the construction contracting chain, and this is not lost on the American Subcontractor Association.
The ASA’s vision is to be the “united voice dedicated to improving the business environment [for subcontractors] in the construction industry.” In doing that, the ASA advocates against contingent payment clauses, onerous notice and claim provisions, mechanics lien and bond claim restrictions, over-broad lien waivers, and other common actions taken by general contractors, developers, and lenders to shift more risk and more exposure onto subcontractors.
These risk-shifting actions have been taking place for over 200 years.
Textura’s business model has the company selling CPM to general contractors, property developers, and lenders proposing that the product will enable them to reduce legal exposure and financial risk. For subcontractors and the ASA, however, there is an arguable problem with the CPM business model, in that the tool emboldens general contractors to exert even more leverage and pressure in the payment process, a process “of great importance to ASA members.”
Subcontractors are already “kicking and screaming” for payment reform because of these commonplace payment abuses, and the ASA is spending tons of money and resources to fix regulatory leaks nationwide that put subcontractors in financial risk trick-bags.
Subcontractors need more friends on board – but is Textura a friend that can be on their side, or a wolf in sheep’s clothing?
Everyone Benefits from a Fair Construction Payment Process
There is nothing inherently wrong or unfair about the construction industry’s payment processes. The industry’s landscape just makes it really, really hard to actually pull off. There are problems around every corner: personality conflicts, weather, unknown site conditions, workmanship disputes, and more.
Precisely because so much can go wrong, industry participants have spent decades trying to insulate themselves from those problems.
The legislatures created mechanics lien laws to ensure subcontractors are paid. General contractors combatted with contingent payment clauses and lien waiver contracts to push the risk of non-payment off their shoulders. And on and on.
What if the best way to insulate against problems and risk was just a commitment to fairness?
Let’s travel upstream and figure out how companies go from good intentions to maximizing leverage. What explains this? Companies don’t go into new projects intending to out-leverage other participants. They wind up there because they are hyper-paranoid about down-the-chain risks, and engage in a battle to “stay ahead” of the other party on payments. This incrementally builds pressure across the project’s participants, and everyone winds up with the things they were trying to avoid: liens, claims, delays, and disputes.
So let’s travel upstream and figure out how companies go from good intentions to maximizing leverage. What explains this?
We assert and believe that the explanation is simple. Parties have become so crazed about collecting contract negotiation wins and leverage points that they overlook a simple solution: more transparency and a commitment to a fair process.
The mechanics lien remedy may have a lot of baggage. After all, everyone is trying to avoid lien claims. This tool, however, was not created to torment lenders, property owners, and general contractors. To the contrary, it was created to establish a risk baseline: Those who are commissioning the project must pay for it.
Everyone agrees with this risk baseline, and mechanics lien and bond claim laws are full of protections for all parties in the contracting chain. Those looking to get paid for work done can use the lien right to make sure they do. Those needing to pay for work, can use the preliminary notice process to make sure they know who to pay and where their risks are.
The lien and notice process is not the problem, it’s the solution, and embracing this process is the key to fair construction payments.