This blog is a collaboration with our friends at Levelset.
According to a 2020 construction payment report, contractors and suppliers were suffering from cash flow problems well before the coronavirus hit. Only about 50% said they regularly received payment within 30 days of invoicing. However, they reported an overwhelming reluctance to do anything to speed up the payment process. As COVID-19 reveals just how vulnerable construction businesses are, it also provides a reliable roadmap for the road ahead—no matter how bumpy it gets.
Payments before COVID-19
Whether acting out of optimism, complacency, or fear, nearly 70% of contractors said they rarely or never sent preliminary notices—documents proven to speed up payment—on every job. But their reluctance to get paid faster extended beyond exchanging simple documents. An even greater number said they almost never charged interest on late payments or offered early payment discounts.
In the world before COVID-19, many contractors simply saw chasing late payments as an inherent part of the game. 80% of construction business employees said they spent a significant portion of their workweek chasing down payments. They were happy to collect what they could, whenever the property owner decided to pay.
How construction payments have changed
Prior to the pandemic, the construction industry had enjoyed a long period of sustained growth. Experts were optimistic about future gains. In a matter of days, that optimism all but disappeared.
The impact of coronavirus on the construction industry has been wide-ranging, delaying materials shipments, shutting down or slowing projects, and depleting cash reserves. In a survey from the AGC (Association of General Contractors), nearly 75% of their members had applied for a Paycheck Protection Loan from the SBA—a clear sign that contractors are worried about their future income.
At the same time, construction payment disputes have been rising quickly. According to county filing data from across the country, mechanics lien claims jumped 65% from February to April. That number will likely skyrocket as lien deadlines start to hit for companies who completed their work in more recent months. Companies that once feared alienating customers over sending a preliminary notice or notice of intent to lien are taking action born out of a different fear: bankruptcy.
The protective power of preliminary notices
Contractors’ previous reluctance to use preliminary notices is surprising, given their wide-ranging benefits on a construction project. When it comes to making payments on a job, property owners and general contractors work hard to make sure every trade partner and supplier gets what they earn. They have a vested interest in paying everyone and avoiding mechanics lien claims.
Unfortunately, the larger a project gets, the harder it becomes to identify every company that’s supplying labor, materials, or equipment. Collecting preliminary notices is critical for seeing everyone that needs to get paid, and ensuring that they do.
For those at the bottom of the chain of construction payments, like sub-subcontractors and material suppliers, sending preliminary notice helps speed up their payment. In states where preliminary notice is part of the mechanics lien process, sending it virtually guarantees that they will get paid. On every project, sending notice helps improve communication and improve payment speed—even when the state doesn’t require it.
Moving forward and expecting the unexpected
If COVID-19 has shown us anything, it’s how quickly the situation can change. In November 2019, rosy expectations for construction growth allowed slow-paid contractors to wait and hope for the best.
Previously, construction businesses largely neglected to protect their jobs with preliminary notices. In the rush to collect on outstanding invoices after the coronavirus hit, those without preliminary protection were left out in the cold.
In the new normal, everyone in construction will need to prepare for the unexpected. If the next global pandemic hits next month, how can you trust that the GC who has paid on time for the last ten years won’t run out of cash? Can you be sure that the billion-dollar luxury condo project won’t be shut down or run out of funding? Coronavirus or not, nothing in construction is guaranteed.
The pandemic has exposed critical weaknesses in the collection processes of many contracting companies. Going forward, the most successful construction businesses will invest in processes that make them more resilient to an unpredictable turn of events. Sending construction notices won’t solve all of a contractor’s problems, but those that update their policies to send preliminary notices on every project—and protect their mechanics lien rights at all costs—will be in a much better position to ride out the next financial storm.
About the author
Justin Gitelman is the Content Coordinator at Levelset, where over 500,000 contractors and suppliers connect on a cloud-based platform to make payment processes stress-free. Levelset helps contractors and suppliers get payment under control, and sees a world where no one loses a night’s sleep over payment.