U.S. Legislators Aim For Faster Construction Company Payments

Legislators in markets like the U.K. and Australia have begun to publicly combat late supplier payments to SMEs, but efforts in the U.S. have been far less vocal. But a new bill in the U.S. House of Representatives may get the discussion going around late invoice payments and SME cash flow management struggles.

The Small Business Payment for Performance Act, approved last month by the House Small Business Committee, aims to accelerate payments to small companies contracted by federal agencies.

But the legislation isn’t exactly far-reaching: According to reports, the rules focus on small federal contractors that request an increase in compensation by their clients, and on construction companies in particular. Reports in the Associated Press last week explained that often, federal agencies will delay approving higher compensation until the end of a project. That means SMEs have to wait for full payment while the agency and small business are negotiating.

According to Rep. Brian Fitzpatrick (R-PA), who introduced the bill, this practice is known as change orders.

Reports in JD Supra explained that this will have a particular effect on construction companies and would allow those businesses to receive interim partial payments when an increase in compensation is requested. The legislation requires small construction contractors to submit a “request an equitable adjustment,” or REA, in a timely manner, and pass on a portion of the payments they receive to first-tier subcontractors, who then must pay lower-tier subcontractors, and so on.

Delays in compensation to SMEs often result in “significant financial hardship to contractors, small and large alike, as they and their subcontractors must effectively finance the changed work until the agency agrees to the cost of that unilateral change,” the publication explained.

The legislation does not specify how quickly these payments must be made, but decades-old law requires “prompt payment.”

“Passage of this Bill into law would be a tremendous improvement for construction SBCs,” the publication wrote. “While not perfect, it is a significant improvement over the status quo.”

FinTech Plays A Role

That “status quo” of delayed payments in the construction industry has been a focus of several FinTechs in recent years.

Last May, research from the Equipment Leasing and Financial Assn. explored how changes in economic policy could affect the construction sector, which according to the ELFA, is experiencing an increase in demand for equipment financing.

“Equipment finance is on the rise in 2017, fueled by a steadily growing economy,” said ELFA President and CEO Ralph Petta in a statement. The report found that nearly eight in 10 SMEs in the U.S. depend on equipment financing, with analysis eyeing President Donald Trump’s reported plans for an  infrastructure budget of more than $1 trillion.

That means small construction companies will have new opportunities to land a contract with a federal agency, but they may have to turn to borrowing funds to finance the equipment they need to do the work.

One company, lienwaivers.io, targets the particular pain point of cash flow problems for construction companies. Businesses can place a lien on property until payment for services and materials is collected, then sign a lien waiver once they are paid. Lienwaivers.io CEO and cofounder Geoff Arnold told PYMNTS earlier this year that the process is complex and paper-ridden and often takes a long time, leading to delays in construction company payments.

AvidXchange, meanwhile, also set out to tackle this issue this year. The company revealed a partnership with GCPay last February, with AvidXchange providing its AP automation solutions for construction companies using GCPay in an effort to promote accelerated electronic payments to subcontractors.

According to Daniel Brunelli, GCPay’s chief operating officer, subcontractor payments “can represent 75 percent or more of the total cost of a construction project.”

That means adequate cash flow is critical not only for the contractor but for subcontractors, and delayed payments can quickly cause a blockage in payments down the chain. Considering most small businesses across industries are struggling with cash flow – a Dun & Bradstreet and Pepperdine Graziadio School of Business and Management report released last week found 66 percent of U.S. SMEs say they faced working capital challenges in the last three months – accelerated payments to small construction companies contracted by the federal government will be critical to easing some of that pain.

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