B2B Payments

Why Communication Is Key To Faster Construction Payments

Late payments are a headache for any industry, but the construction sector has seen some particularly detrimental effects from cash-flow bottlenecks.

In the U.K., the collapse of construction conglomerate Carillion pulled back the curtains on the corporate’s B2B payment practices. Just a few months later, Welsh construction giant Dawnus met its demise, again calling to light the troubling practice of delaying payments to suppliers and subcontractors, often small businesses.

This point of friction is by no means isolated to the U.K. A recent PYMNTS deep dive into the industry pointed to PwC data that shows an average of about 70 days sales outstanding (DSO) for the sector — making it the industry with the longest DSO — with experts warning that this effect can not only limit cash flow down construction supply chains, but complicate businesses’ efforts to hire and retain staff, invest in equipment for projects and pursue additional contracts to fuel growth.

Paper invoices are among the construction sector’s biggest challenges. According to Danielle Sandoval, group product manager, invoicing and payments at construction management software company Procore Technologies, payment times can reach as high as 120 days in this industry, often linked to the sluggishness of paper invoice processing.

“Specifically in the construction industry, delayed payments are very common, and unfortunately they are even accepted as normal,” she told PYMNTS, adding that paper invoicing limits businesses’ flexibility to adapt to the inevitable changes in projects as they progress. “The majority of these time delays are due to discrepancies during the invoicing process or miscommunication around work completed or billed.”

Electronic invoicing certainly is key to accelerating processing and approvals for faster payment speeds. As Sandoval noted, invoice approval in the construction space requires input from suppliers through to bank lenders; digitization of information makes for accelerated movement of that data between players.

Recent analysis from Contract Simply noted 88 percent of contractors wait at least 30 days to receive payment, with 46 percent having waited between 60 and 90 days, leading businesses to rely on external financing to manage working capital while they wait. A 2018 industry report from the World Economic Forum found full-scale digitization in construction would save 21 percent in costs by 2026.

Digitizing invoices is only the beginning of addressing the cash flow bottleneck, however.

Sandoval highlighted friction within the change order management process that is especially painful in this field. Change orders are any project changes ordered by a project manager or owner, which can affect anything from schedule timing to the requirements of an existing contract. A unique challenge to the construction sector, change orders are typically written physical documents that can disrupt operations.

Law firm Davis Bucco noted in a recent article that on average, a construction project will see more than 50 change orders. “Unforeseen difficulties, improvements to the original plans, and scheduling hassles can send a construction project in a new direction, spark contention, and ultimately make change order disputes likely,” the firm stated. “What a subcontractor sees as a departure from or addition to the scope of work, the owner or designed may interpret as the subcontractor failing to carry through with expected work.”

Unsurprisingly, change order disputes and the friction associated with adjusting to project changes can cause significant payment delays and bottlenecks, too, while also limiting visibility in the billing process that can prevent a business from confirming invoices and bills are updated and reflect those changes.

“Change orders can be the downfall of any projects resulting in lawsuits, delays, strained relationships, and expensive mistakes,” said Sandoval. “Since all construction projects end up with changes to scope that are unplanned, knowing the cost implication and facilitation of that information is paramount in making sure the project stays on-time and within budget.”

According to Sandoval, data digitization not only accelerates the speed with which information on invoices and change orders are processed internally but facilitates collaboration between everyone involved in a project.

Communication brings all of the moving parts of a construction project together to ensure players are on the same page. With technology quickly moving into the sector as it identifies more points of friction in supply chains and cash flows, the ability for documents to be digitized, and for various back-office technology platforms to integrate with each other — and with the platforms used by business partners — seamless movement of information down construction supply chains will foster the collaboration that is key to accelerating payments.

While the opportunities to target friction are numerous, Sandoval noted that the invoice is a good place to start.

“Since cash flow is the lifeblood of any company, I can’t think of an area that would be more impactful to collaborate expeditiously than in submitting an invoice and getting paid,” she said. “If all parties chose to share data seamlessly and timely, all stakeholders would benefit from increased cash flow and greater insight into the health of their project.”

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