How to solve the challenges affecting payments in the construction industry?
SaaS companies looking to break into the sector must provide value and contribute to diminishing the costs of late construction payments by offering solutions like workflow automation, streamlining payment systems, and providing access to working capital management solutions.
Getting paid on time is a universal challenge in the construction industry, with cash flow disruptions posing significant threats to businesses of all sizes. A PwC Working Capital Study from 2023 shows that, on average, it takes construction contractors 110 days to collect payments, making the industry particularly vulnerable to working capital challenges. Just last year, over 80% of contractors reported payment delays of over 30 days.
This post examines the key issues construction companies face regarding payments, why these problems persist, and actionable strategies to overcome them.
The Cost of Payment Delays in the Construction Industry
In 2024, delayed payments have increased construction costs by 14% of total spending, amounting to a staggering $280 billion. This financial burden extends far beyond simple transactional inefficiencies, creating a complex web of economic challenges for the construction industry.
Key implications of construction payment delays
- Operational Inefficiencies: General contractors spend 56 hours per month managing payments to subcontractors and vendors, up 27% from the previous year.
- Working Capital Challenges: Subcontractors and smaller firms face the harshest consequences, with many struggling to meet payroll or material costs. In January 2024, the number of subcontractors increasingly using their personal savings for business purposes was up 105% compared to the previous year.
- Project Delays: Cash flow issues can result in stalled projects as companies struggle to procure materials or pay workers on time.
- Increased Borrowing Costs: Many firms rely on short-term financing to bridge gaps, which adds to their financial burden.
- Workforce Consequences: Late payments can lead to missed payroll deadlines, directly affecting workforce morale and retention.
How Construction Payments Work? Understanding the Stakeholders in the Construction Payment Chain
The high number of stakeholders and intermediaries in the flow of payments, mismatched payment terms, lengthy project timelines and intricate contractual agreements lead to delayed payments which create cash flow issues, trickling down the supply chain.
Who are the key stakeholders in the construction payment chain?
Owners / Financiers: The project’s initiators, paying for the work and setting project goals. They are sent one consolidated invoice for all the work completed by the general contractor and after running their own due diligence on the work done they pay the general contractor either directly or via a draw request to the funding bank.
General Contractors (GCs): Manage the overall construction project, coordinate with subcontractors, and ensure project delivery according to specifications. Acting as intermediaries between owners and subcontractors, GCs receive invoices from all subcontractors, ensure the work has been completed, and consolidate all payments into a single invoice for the owner. Once they are paid, the money flows down the payment chain.
Subcontractors: Hired by general contractors to perform specialised tasks such as plumbing, roofing, etc. They are paid weekly or monthly based on the percentage of work completed. To be paid, they send an invoice to the general contractor.
Material Suppliers: Provide the construction materials (steel, concrete, pipes, etc.) required for the subcontractors to complete their jobs. Subcontractors tend to purchase material upfront on 30-day terms. Workers: Waged labourers hired by the subcontractors to perform the work. They are typically paid every week.
6 Reasons Why Payments in Construction Are So Delayed
In addition to a complex network of stakeholders, the following are contributors to payment delays in the construction sector.
1. Inneficient Invoicing and Documentation
Errors or incomplete documentation often cause delays in invoice approvals. This is exacerbated by a reliance on outdated and analogue processes.
2. Complex Contractual Agreements
Payment terms in construction contracts can be complex, contingent payment clauses, such as “pay-when-paid”.
3. Retentions and Withheld Payments
Retainage clauses, where a percentage of payments is held back as security for project quality, can strain cash flow, particularly when funds are released late.
4. Disputes Over Work Scope and Quality
Ambiguity in contracts or disagreements over project deliverables can lead to payment disputes, causing further delays.
5. Financial Instability Among Clients
Developers or project owners may experience financial difficulties, which can lead to a cascade of delayed payments throughout the supply chain.
6. Outdated Payment Systems
Reliance on manual payment methods, including checks and outdated systems, significantly slows down the payment process. This adds inefficiency and hinders real-time tracking of payments.
3 Practical Solutions to Overcome Construction Payment Challenges
Vertical SaaS solutions aiming to enter the construction sector must address the inefficiencies in and surrounding construction payment flows to provide value to customers. Below are some ways to address it:
1. Workflow automation for better documentation and tracking
General construction firms usually manage several projects with many subcontractors and suppliers using time-consuming, manual processes. Workflow automation for documentation and tracking becomes key to creating efficiencies, increasing productivity and reducing errors.
Monite’s Bill Pay and Invoicing APIs and SDKs include a Project Feature, which allows your construction clients to aggregate and track payables and receivables under a single headline project. They can easily assign start/end dates, project-related tags and other attributes to monitor financials and resource allocation, improving control over project timelines and spending.
2. Streamline Payment Systems
With general contractors spending up to 56 hours per month managing payments to subcontractors and vendors, automated invoicing and Bill Pay workflows increase efficiency, visibility, and communications across all parties in the chain. They speed up the payment process by eliminating analogue processes and checks whilst reducing errors.
Monite’s Bill Pay and Invoicing API allow you to offer accounts payable and receivables automation to your construction clients directly from your platform in as little as 2 days using iFrame or in a few weeks with either SDK or API.
3. Provide access to Working Capital Management Solutions
Working capital challenges are common in the construction industry, where late payments and retainage are the norm. Complex billing structures and a network of stakeholders further complicate these challenges. Subcontractors, the last in line to receive payments, are the most affected as they must incur considerable upfront expenses to complete their services. In 2024, 73% of subcontractors had to pay out of pocket for materials, leading them to use personal savings.
With Monite, you can directly offer your clients working capital management solutions for all invoices and bills registered on our rails.
Let your clients take control of their cash flow by seamlessly providing access to capital without the headache of traditional loans through your platform while making extra revenue.
Construction Payment Management: Vertical Solution Strategies
Any vertical solution that wants to break into the construction sector must address its payment challenges to ensure clients’ sustainable growth. Monite offers a comprehensive vertical solution for the construction sector, directly addressing critical payment challenges through its advanced API and SDKs. Book a free demo and jumpstart your revenue with embedded Invoicing
By leveraging Monite’s technology, platforms can quickly implement sophisticated payment processes that improve efficiencies, deliver productivity gains, and provide flexible working capital solutions.
This approach enables clients to enhance customer value, reduce churn, and increase revenue potential within days of integration.