It’s a harsh fact, but it takes longer for construction and engineering firms to get paid than any other industry in the U.S.
The pinch points aren’t simply outdated, PDF-style invoicing processes, but vendor resistance toward modern payments systems that are being widely embraced by other businesses.
This friction forces the industry to rely heavily on complex processes like layers of internal approvals to document sharing for money to flow from lender to developer, general contractors, and tradesman who perform the tasks.
“If we just paid subcontractors and contractors, the people who are owed the money, within 30 days of submitting their invoice, it would eliminate $100 billion of costs in the industry,” Will Mitchell, the CEO of Rabbet, a Texas-based construction finance platform, told PYMNTS.
He said there are two causes for slow payments.
“One is the physical infrastructure of how the money gets to the right authority, and the second being the delays in documentation, approval, and communication process of coordinating information across the industry,” he said.
The $100 Billion Incentive
Clearly, the tedious process slows down the rate at which funds can be disbursed, not only creating a bottleneck of funding down the chain of contractors and subcontractors, but an opportunity to bring old school thinkers into 21st century bill paying.
According to reports from Rabbet, a vast majority of subcontractors get paid far beyond their net-30 terms. Nearly half wait up to 90 days to receive funds, and this inability to get money to the people who it’s owed on time is costly, and in some cases, fatal to smaller companies.
Unsurprisingly, FinTechs have noticed the lack of physical infrastructure in the construction industry and have already started innovating in that area. Solutions like push payments, same-day payments and ACH credit cards have successfully shortened the time. However, the inconsistency in the internal structure remains the critical bottleneck for the delays. Mitchell explained that the time to mail the check and deposit the check and then have the funds cleared is seven of the average 54 days of outstanding sales in the construction industry, while the other 47 days delay is due to irregularities in coordinating information across the industry.
A collaborative effort is needed between the developmental and accounting teams in order to enhance the invoice management process in the real estate industry.
“What the integration will do is allow us to coordinate the documentation and approval process across the industry faster and really hammer into solving that other 47 days of delays that are not caused by the payment infrastructure,” Mitchell said.
According to Mitchell, Rabbet’s goal is to help the development and accounting teams communicate more efficiently. A partnership with AvidXchange announced last month will enable the development team using Rabbet to quickly communicate with the accounting team regarding the corresponding funds that are simultaneously approved and channeled from the bank and equity partner.
Read more: Rabbet Partners With AvidXchange on Real Estate Invoice Management
“Connecting the [accounting and development operations], getting the money from the partners and lenders to the people to be paid is a big part of the value,” Mitchell said.
In an ideal real-world situation, the vendor would send their invoices through a system. The developers would quickly access the request and approve it based on appropriate terms before sending it to the lender or equity partner for funding. At the same time, the software would push over the information to the accounting system to avoid delays and allow the data related to that approved invoice to be ready for payments. As soon as the funds are transferred, the accounting team would quickly process payments to pay the vendors on the project.
“The ability to transfer and communicate information around payment status and documentation is extremely valuable for everyone in the industry and emphasizes the fact that it’s not just about the payment routes and the speed, but how collaboration and documentation can occur on a shared platform that allows for the real bottleneck to be solved,” Mitchell said.
See also: Why Construction Payments’ Friction Has Nothing to Do With Payments
Resistance Toward a Complete Digital Shift
The real bottleneck is the change management and existing practices. Mitchell shared that the majority of vendors and suppliers in the construction industry do not want to give out their bank information and prefer to mail checks instead.
“The technology is light years ahead of the industry’s ability to move as fast as the technology,” he said.
He said the possible solution to this, in his opinion, is the modernization of the executive leadership positions in organizations.
“As younger people take over more executive leadership positions in organizations, this is slowly evolving, as the generation that grew up on [technology] feel far more comfortable with these tasks,” he said. “However, I do not believe that purely education will solve the problem.”
He said he believes that there needs to be a very compelling reason for this change.
“If can get my payments 45 days faster because I’m working with a platform that collects information, allows for invoice factoring to leverage real-time payments and invoice submission, enables lenders to provide value and discount on interest rates because the risks are mitigated through online tracking, then that is a compelling reason for people in strategic positions to make the disruptive changes based on its benefits for everyone,” he said.
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