Nearly two years have passed since U.K. construction giant Carillion collapsed, but the saga continues to send shockwaves throughout the global construction industry.
One of the largest impacts the case has had is in shedding light on the sector’s cash flow crunch and an epidemic of late payments to contractors and subcontractors.
In cases like Carillion, analysts have raised concerns that large conglomerates are intentionally withholding payments to take advantage of capital float — to the dismay of smaller players and professionals in the market. But Scott Wolfe, CEO of Levelset (formerly known as Zlien), told PYMNTS that market fragmentation is holding up B2B cash flows, even as larger contractors or lenders want to disburse payments down the supply chain.
“Small businesses are the fabric of the construction industry,” he said. “They’re also in the thick of these payment pains. On one project, you’ll have a mega player — a big general contractor or a lender — but you have 150 fragmented tiny players who are overlooked with respect to the payments problem.”
That fragmentation creates significant friction points and bottlenecks in the payments process. In the construction space, a complex web of data and document exchange must occur before B2B payments can be approved and completed, and with so much occurring on paper, late payments are almost inevitable.
Regulation Steps In
In the U.K., incidents like Carillion have led to a string of regulatory efforts designed to encourage faster B2B payments in the construction vertical and beyond. One of those is the Prompt Payment Code, a voluntary code that large corporates can sign to vow to pay their small vendors more quickly.
One of the largest challenges of the initiative, however, is its enforcement limitations. The government has introduced measures, including a name-and-shame approach to warning suppliers about companies that have a history of paying suppliers late, as well as restrictions on whether late payers can bid on government contracts.
Wolfe also noted that these efforts introduce the same type of effect that platforms like Yelp and Glassdoor have had on the consumer and professional workforce markets. In short, they add an incentive for corporates to pay their suppliers on time.
“I think it’s an important part of taking incentives that naturally exist in the marketplace to make sure that the workforce of subcontractors are paid quickly,” Wolfe said.
What’s important to acknowledge, however, is that malicious late payments are not the norm for the construction sector. Rather, Wolfe noted, contractors and other large players in the market have other motivations to accelerate payments to their “subs” (subcontractors).
“In large part, what I find of the industry is that contractors want to pay their subs, and pay them fast, because there’s a labor shortage out there, and they are competing for subs just like employers compete for talent,” he said. “Contractors, owners and developers want their workforce — which are the subcontractors — to not be starving for cash.”
It’s up to technology providers like Levelset to remove those barriers to the faster payment capabilities that these businesses in the construction sector want, he said.
There is growing demand in the industry for such tools, with investors recently backing Levelset’s own technology aimed at accelerating B2B cash flow in the construction arena in a reflection of that market opportunity. The company announced last week $30 million in funding led by Horizons Ventures, with S3 Ventures, Altos Ventures, Operating Venture Capital, Michael Gollner, and Brick & Mortar Ventures’ Darren Bechtel also participating.
“You’re starting to see investment really get momentum in this category,” said Wolfe. “It’s really fantastic for the industry that so much investment is starting to go into this, and it compounds. At first, it’s a trickle. And then you have a ton of money to innovate in this area, and I think you’ll start to see some really interesting innovations pop out that can make an impact on this messy and painful problem.”
Critical to removing barriers to faster payment is enabling digitization and automation within the workflow and document management side of a transaction before any payment ever occurs. That’s where Levelset operates, and while Wolfe said the company isn’t not interested in enabling the actual payment to occur within its platform, the company will continue to focus its efforts on removing those pre-transaction barriers to getting subcontractors paid more quickly.
It’s less important to define and dictate a certain electronic payment tool, like ACH or commercial cards, to enable faster payments, Wolfe said. Rather, what’s key is overall digitization, which includes migrating companies off paper checks onto any ePayment solution, and digitizing the document workflow before payment to accelerate approvals.
According to Wolfe, it’s up to technology to find the greatest motivators for industry participants to adopt faster B2B construction payment habits.
“Technology needs to really draw out those incentives for faster payments in order to change the paradigm,” he said.