Late payments cost general contractors and subcontractors across the U.S. approximately $208 billion last year — a 53% increase from 2021, according to a 2022 Rabbet report. Many of these costs can be passed down to real estate developers (and their investors), but others are absorbed by the construction businesses, thereby reducing margins.
This problem comes at a time when high inflation, labor shortages and global supply chain issues have already lengthened project timelines and made completing projects difficult. The study also noted:
- 62% of general contractors incurred billing charges, financing charges or additional costs as a result of late payments
- 37% of general contractors and subs had their work delayed or stopped due to the fact they couldn’t make payroll
- General contractors saw an 8.5x increase in using their own retirement savings to float funds for their businesses
- General contractors reported spending an average of 44 hours per month managing payments to subs and vendors.
Additionally, according to the Associated Builders & Contractors Construction Confidence Index, contractors’ confidence in their profit margins and staffing levels fell in 2022. Moreover, last year's costs for some key inputs were up nearly 16% from 2021. These sobering numbers came in even before 2023 dawned with its predictions of a possible recession.
These worrisome sentiments align with recent data from Xero’s Small Business Insights (XSBI) report, which suggests that late payments will continue to be a significant economic challenge for businesses across sectors. In recent months, payments have been made 7.2 days late on average. Moreover, small business owners had to wait an average of 26.4 days between invoicing and receiving payment. Adding insult to injury, the report demonstrates that sales growth for U.S. small businesses has continued to slow over recent months, likely due to inflation’s impact limiting the capacity of consumers and businesses to spend.
This data hints that the construction industry will continue to see challenges around late payments, paying suppliers, meeting payroll and overall cash flow management.
Reason for Optimism
There are some key strategies for construction business owners to be more resilient and navigate these impending factors in 2023.
One avenue to consider is the use of digital tools in backend operations by implementing financial technology that can help track cash flow and mitigate problems such as late payments. Digital tools also can help builders leapfrog their competition. McKinsey recently reported that despite the construction industry accounting for 13% of worldwide GDP, the industry’s efficiency has grown by just 1% over the past few decades – one of the lowest rates of digitization across all sectors.
Investing in cloud-based accounting software can help reduce financial risk and streamline operations in a variety of ways. For example, it can enable construction businesses and their bookkeepers to send digital bids and bill customers immediately with electronic invoices. It’s surprising how much the tactic of sending a customer their digital invoices on a regular basis with a “click to pay electronically” option can reduce late payments. These systems also can flag which invoices are nearing (or beyond) past-due status, so the business can move proactively to collect payments. Cloud software can even spot patterns like customers who continually pay late so builders can change contract terms or even cut off risky clients.
Businesses can also make rapid electronic payments to suppliers, subcontractors and laborers — or easily schedule payments in advance with a few mouse clicks, which eradicates late fees. Eliminating paper-based invoices and checks also reduces errors, increases efficiency and accuracy, and delivers improved security.
Most important, perhaps, is that a builder and their accountant or bookkeeper can share all this functionality via the cloud to collaborate and eliminate surprises when it comes to critical financial data. Cloud-based software becomes the single source of truth to view where the finances actually stand. In fact, prioritizing real-time access to all data that impacts current and projected cash flow should be a builder’s top priority when it comes to digitization that addresses possible business challenges this year.
The tech stack a builder invests in should be able to integrate with every data set and digital tool they and their accountants/bookkeepers need to run the business. One of the major benefits of cloud-based accounting software is that the leading providers operate app ecosystems where users can choose from hundreds of apps to extend the functionality of their core accounting system. These apps provide functionality ranging from job estimating and scheduling to inventory management.
In summary, yes, there might be a high level of uncertainty about prospects in 2023. But, as with everything in the construction sector, there is the right tool for the job. By adopting digital tools that manage financial information in the most efficient and effective ways, builders can lay a solid operational foundation to enable them to survive – and even thrive – during economic volatility and achieve long-term success.
