Magazine article Business Credit

Payment Cycle Needs Speeding Up

Magazine article Business Credit

Payment Cycle Needs Speeding Up

Article excerpt

The construction payment cycle is one of the longest in commercial credit. According to a new report from Contract Simply, subcontractors are facing a 54-day DSO (days sales outstanding) in the U.S. 'The cash flow cycle results in significant financing costs as well as liens placed against the properties to ensure payment," noted the Construction Payments Report 2018.

It is estimated slow payments cost the industry $40 billion in fees, which are "built into [subcontractor] proposals, so expediting payments has the potential to remove an existing 'cost' in the current ecosystem." Construction, as a whole, is a $1.2 trillion industry.

One of the main reasons why subcontractors are waiting nearly two months for payment is due to a stoppage further up the projects chain. Nearly half of the 1,300 contractors surveyed report waiting 60-90 days for payment. Roughly nine out of 10 contractors are waiting more than a month for payment. This delay is causing contractors to open lines of credit (46%). Five out of six contractors are also reporting they have filed a mechanic's lien due to lagging payments.

Contract Simply suggested lenders and borrowers offer net 30-day terms to help lower costs and speed up the payment cycle. Of those surveyed, 70% said they would offer a discount for payments within 30 days-some as much as a 10% markdown. "That's an opportunity for developers, builders and lenders to capture over $18 billion of value," the report stated.

Unfortunately, sometimes it is too late to recover from a payment blowout in the construction industry, which was seen during the first half of the year with the collapse of United Kingdom construction giant Carillion. …

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