The construction industry has a problem with making payments on time. According to Levelset data, over 60,000 mechanics liens were filed on construction projects in 2021, totaling more than $5 billion in late payments — a staggering number that only begins to shine a light on the challenge that construction businesses face on a daily basis.
McGillivray Construction earned the unwanted distinction of filing the largest lien of the past year, claiming $141.6 million on a Community Memorial Hospital Health Systems project in Ventura, California.
However, the scope of the problem goes well beyond a single multi-million-dollar dispute. In fact, more than 26,000 construction businesses filed mechanics liens in 2021 — that’s an average of $196,000 per claim and 2.3 liens per claimant.
The impact is disproportionately felt by small construction businesses. Last year 35,000 liens — more than half of the total claims filed in 2021 — were worth less than $15,000.
But the $5+ billion in lien claims only scratches the surface of the actual cost. Late payments force construction companies to carry additional costs that eat into their margins. Interest charges and vendor penalties pile up while they wait for payments to come in. A lack of cash stifles a business’s ability to grow.
And with the US inflation rate hitting 7% in 2021 — a 39-year high — delays forced the actual value of those payments to fall dramatically.
According to a report from accounting firm Price Waterhouse Coopers, the US construction industry’s average days sales outstanding was 83 days in 2018 — among the slowest of any economic sector.
The long gap between service and payment forces construction companies to rely heavily on financing and credit – and collection problems are a major reason why construction has one of the highest failure rates of any industry.
“A lot of construction professionals mistakenly believe that profit is the key to success in the industry,” writes Levelset’s Jonny Finity. “As long as revenue exceeds expenses, the business is safe from financial ruin, right? Unfortunately, this is wrong — and this false belief drives many, many companies out of business.”
“You can run the most profitable construction business in the world,” Finity continues, “but if you don’t have enough cash coming in to cover your bills, you will be forced to look for additional financing (if you can get it) or declare bankruptcy.”
According to Levelset’s 2021 Construction Cash Flow & Payment Report, based on a survey of 741 construction professionals, only 11% say they are always paid in full, and just 9% report being paid on time on every project. And it’s not getting better: Both measures declined sharply from previous years.
While $5 billion is an alarming figure, the true value of delinquent payments is likely significantly higher. In the 2021 report, 1 in 3 construction professionals said their company would only file a lien if the late payment were above a certain threshold.
Of course, not everyone in the industry can be as choosy; last year construction firms filed 1,133 liens for missed payments worth less than $500.
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