Prompt Payment and Risk Management

An interesting study was published recently on the impact of slow payments in the construction industry. It estimated that the average payment cycle for subcontractors is 54 days, and that is costing the industry over $40 billion dollars each year. That’s a staggering figure, but one that makes sense when you consider the cost of construction rising and the amount of financing it takes for subcontractors to stay in business. This added cost comes from a number of sources:

  • Finance charges from lines of credit subcontractors must take out to afford materials.
  • Late fees assessed by suppliers when subcontractors can’t pay bills due to non-payment.
  • Lost revenue from liquid assets being stuck in accounts receivable versus short-term investments.
  • The inability for subcontractors to obtain discounts from their vendors for prompt payment.

While this stresses the importance of making prompt payments on construction projects for the benefit of subcontractors succeeding, there is also a major risk to our developers. The financial squeeze put on subcontractors puts projects at risk for financial-related delays like Mechanic’s Liens and subcontractor defaults. As a developer, you can mitigate these several ways:

  • Select a general contractor that includes a review of their subcontractors’ financial statements as part of their prequalification process. The Douglas Company puts Project Managers through financial and accounting training on how to review balance sheets and income statements to ensure we’re making smart selections for partners who can carry their payroll and material costs several months.
  • Control the amount of paperwork required for each draw by your lender. Financial institutions are requiring a growing amount of documentation to fund a monthly construction draw. Make sure the documents your lender is asking for actually provide a risk-mitigation benefit to you and aren’t just added delays to your draws being funded.
  • Review your general contractor’s familiarity with the payment requests your job requires. For example, if you financed through HUD there are extensive forms that must be filled out with each draw. The Douglas Company has experience with HUD, AIA, and many other forms of financier-driven billing requirements, and that experience helps take the burden off of the developer.
  • Insist that your Architect’s Construction Administrator reviews and processes monthly draws quickly so as not to hold up the process at the first stage. Often times the bank will complete their own progress inspections too, which may also require follow-up to make sure they happen promptly
  • Ensure your general contractor is taking the right amount of responsibility for making payments. In our lump-sum contracting approach for example, once payment is made to The Douglas Company then we are responsible for properly disbursing and collecting lien waivers for your protection. If something goes wrong with a subcontractor and the developer has paid us, it’s our responsibility to resolve the issue.

You can review the article cited here at the following link:

Bruce Douglas, PMP, PMI-SP, LEED AP BD+C
Senior Project Manager
The Douglas Company



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