Pandemic Magnifies Financial Risk in Construction in 2021: Slower Payments Drive More Lien Claims
General contractors and residential builders report most reliable payment, but cash flow problems persist for everyone in the industry, according to Levelset's 2021 Construction Cash Flow & Payment Report.
NEW ORLEANS, June 17, 2021 (Newswire.com) - This year, just one construction business in 10 always gets paid in full, a 75% drop from before the pandemic, according to the newly released 2021 Construction Cash Flow & Payment Report from construction software company Levelset. Payment delays have also worsened: a mere 9% of companies always get paid on time, a decline of 60% from last year. The decrease in payment reliability is tightening the financial vise on construction companies.
In the report, based on a survey of 764 construction professionals, financial risk correlates directly to the construction payment chain. General contractors -- those at the top of the chain -- are four times more likely than subcontractors to get paid within 30 days and 50% more likely to get paid in full. Subcontractors, suppliers, and other sub-tier parties bear the brunt of the financial burden, with one in five regularly waiting beyond 60 days to collect payment.
The gap widens even further when it comes to collecting retainage, which 61% of all businesses say is "very important" or "the most important factor" for cash flow. Fifty-six percent of subcontractors wait more than 60 days to collect retained funds, compared to just 16% of general contractors.
Payment speed also correlates strongly to project type. By almost every measure, residential construction companies fared significantly better than their counterparts in both public and commercial construction. Residential construction companies are three times more likely to collect payment within 30 days than those on commercial projects, and five times more likely than those on public projects and while only one in five homebuilders (17%) say they always get paid on time, they vastly outperform those on government projects (7%) and commercial jobs (4%).
"The pandemic drove financial uncertainty through the roof and put an extra kink in the flow of cash on projects across the country," says Scott Wolfe Jr, CEO of Levelset. "Payment delays throttle a company's ability to be competitive, take on new projects, and grow their business. We are seeing this happen across the industry, with companies further down the paychain experiencing more of these pains."
After 40 days, one in five construction businesses is cash flow negative, having already paid their subcontractors, suppliers, and other vendors, but still waiting for payment. Forty-seven percent of companies say payment delays reduce their profit, and one in three turn to loans or other financing to bridge the cash flow gap, adding interest and other charges.
To mitigate potential payment issues or to collect payment, contractors report an increase in preliminary notices and mechanics liens -- two legal tools businesses use to help ensure they are paid for their work. Just over half of companies (51%) send a preliminary notice on a typical project, up from just 29% in 2020. Lien claims are on the rise as well, with 71% of construction businesses filing a lien over non-payment in 2020, a 22% increase from 2019.
Overall, the industry embraces the use of liens. Nearly two in three businesses say they would support a subcontractor or supplier if they filed a lien (60%), while just 15% say they wouldn't work with that vendor again.
Construction companies also report investing in other solutions that are helping to speed up payment. Today, 83% of construction businesses have the ability to accept electronic payments -- and 79% of that group say it has helped their company get paid faster. Companies using software for tracking and processing payments grew 113% year-over-year, and software for payment paperwork is up 67% since 2019. Just 8% of construction companies say they don't use software at all — down from 21% in 2019.
More information about the survey and a full breakdown of the survey results can be found at https://www.levelset.com/tools/2021-national-construction-payments-report/.
Levelset is a construction software company that helps contractors and suppliers simplify the collection process, reduce credit risk, improve cash flow, and manage their payment rights. The results are faster payments, reliable access to capital, and fewer surprises. Backed by investments from Horizons Ventures, S3 Ventures, Altos Ventures, Operating Venture Capital, and Brick & Mortar Ventures, Levelset is headquartered in New Orleans, Louisiana, with offices in Austin, Texas, and Cairo, Egypt, and has over 200 employees. Learn more at www.levelset.com.