2020 was a hard year for the construction industry, and the full cost of the COVID-19 pandemic’s impact is still being measured. While much of the US is largely back to business as usual, construction businesses are still picking up the pieces from the financial fallout, according to a new report released this week.
The 2021 Construction Cash Flow & Payment Report, based on an April survey of 764 construction businesses across the US, shows how the decline in payment reliability over the past year led to dramatic cash flow shortages that ate into profits — and continues to take an emotional toll on financial professionals across the industry.
In 2020, the pandemic shut down construction projects and drove financial uncertainty through the roof, exposing the cracks in even the best-laid business foundations. While at least 48% of construction businesses report profit margins above 10%, cash flow problems make those figures unlikely to be found on their income statements.
Today, fewer companies are getting paid in full and on time compared to pre-pandemic times. Even for the construction businesses that survived, the resulting cash flow problems ate into profits (47%), delayed projects (33%), and forced them to take out loans (30%) to cover the shortage.
In response, the industry is growing more comfortable with tools and technology that make payments faster and more reliable. More than 8 in 10 companies now accept electronic payments, and 78% of them say it has improved their collection speed.
But construction businesses aren’t leaving collection to chance, either: Today, more companies are using tools to speed up and secure payment, like preliminary notices and mechanics liens, than ever before.
The high cost of late payments
Being able to reliably predict and manage the flow of cash is fundamental to any business, but it’s a particular challenge in construction. Payment reliability was on the decline even before the pandemic, and construction businesses reported a sharp drop in 2021: Only 11% of construction businesses say they always get paid in full — a 74% drop from 2020 and down 82% from 2019. Additionally, delays in payment also worsened for many companies: Just 9% say they always get paid on time, a decline of nearly 60% from the previous year.
But not all construction projects are created equally, and the disparity between construction sectors is stark. Residential construction companies are up to four times more likely to consistently collect payments in full and on time than their counterparts in commercial and public construction.
The credit-heavy nature of the construction industry imposes a cash flow gap on many construction companies, who are often required to pay project costs well before they receive payment from customers. After 40 days, 20% of businesses are cash flow negative, having paid their subcontractors, suppliers, and vendors without collecting the payment necessary to cover the costs.
Nearly half (48%) of all construction businesses — and 61% of contractors and subcontractors — report profit margins on a typical project exceeding 10%. But gaps in cash flow can deplete even the safest margins: Late payments cause reduced profit for 43% of construction companies, and nearly 1 in 3 are forced to finance cash flow gaps, adding interest and other carrying costs that affect the bottom line.
The impact of cash flow problems isn’t just a cost to businesses — for many in the industry, it’s personal, too.
97% of construction professionals say their team members are stressed over slow payments and cash flow, with more than 1 in 5 saying the stress is constant. Those who work exclusively on public construction projects report the biggest personal impact: 37% say they are “constantly” stressed.
Payment expectations don’t match payment reality
Construction has long had a problem with payment speed. In 2018, the average days sales outstanding (DSO) in the US building industry was 83 days — the worst of any industry. But construction companies remain hopeful in their expectations: 81% offer payment terms of up to 30 days on invoices or payment applications. Yet, fewer than 1 in 4 say they typically get paid within the first month after requesting payment.
Among project roles, delays mirror the company’s position on the payment chain: General contractors are at least four times more likely to get paid within 30 days than subcontractors and suppliers. For 1 in 5 sub-tier companies, collection times regularly extend beyond 60 days.
Collection speed is also a factor of the project type. Here again, residential construction companies outperform their counterparts — homebuilders are three times more likely than commercial contractors to collect payment within 30 days of invoicing, and five times more likely than those on public projects.
Disparities in retainage weigh heavily on subcontractors
While delays are common on all payments, few factors are more critical to a construction business’s financial health than their ability to collect retainage, which typically accounts for up to 10% of the contract price. Over 61% of construction companies say that collecting retainage is “very important” or “the most important factor” in managing cash flow. But because retention payments are often withheld until project completion, collection delays commonly exceed those of regular payments.
On average, 21% of businesses say it takes longer than 60 days to collect retainage. But retainage delays do not affect project roles equally: 56% of subcontractors wait more than 60 days to collect retained funds, compared to just 16% of general contractors.
The disparity in retainage delays is even wider between project types. Nearly 1 in 4 commercial contractors and more than 1 in 3 government contractors say they typically wait longer than 90 days to collect retainage payments — a delay that affects just 1 in 20 companies on residential projects.
Adoption of cash flow tools on the rise
The industry is growing more comfortable with preliminary notices and mechanics liens as reliable payment tools. Just over half of companies (51%) send preliminary notice on a typical project, up from just 29% in 2020. Lien claims are on the rise as well: 71% of construction businesses have filed a lien over non-payment, a 22% increase from 2019. And, likely due at least in part to pandemic disruptions, 55% of all businesses report filing at least one mechanics lien claim in the past 12 months — with 41% filing two or more.
Overall, the industry is largely supportive of the use of mechanics liens as a payment tool. Nearly 2 in 3 businesses say they would support a subcontractor or supplier if they filed a lien (60%), while just 15% say they wouldn’t work with that vendor again.
An electronic evolution
Construction companies invested in more technology, software, and digital solutions over the past year, with many office staff adopting tools to support remote work for office staff. While the industry has long relied on paper documents — e.g. contracts, pay applications, specifications, checks — investments in electronic solutions are growing.
Today, 83% of construction businesses have the ability to accept electronic payments. And that investment is paying off — 79% say it has helped their company get paid faster. Payment software adoption has grown dramatically compared to the pre-pandemic era: Companies using software for tracking and processing payments grew 113% year-over-year, and software for payment paperwork is up 67% since 2019.
Just 8% of construction companies say they don’t use software at all — down from 21% in 2019.
The developing future of construction payments
With many US businesses beginning to rebound from the pandemic’s effects, some of these figures surrounding payments across the construction industry are likely to improve. But don’t hold your breath: There was already a decline in payment reliability before the pandemic — and construction companies are almost impressive in their ability to bury their heads in the sand and accept the status quo.
Construction businesses nationwide will have to evolve with the continuously evolving construction payment sphere — from pandemic rebound to the ongoing development of electronic payment tools — to keep their businesses going, and continue to build towards a successful future.