Client Alerts
October 31, 2019

Slow Payment Costs General Contractors and Subcontractors Billions

Stites & Harbison Client Alert, October 31, 2019

by Stites & Harbison, PLLC

A new study found slow payments to general contractors and subcontractors cost $64 billion in 2019 – a nearly $25 billion increase from 2018 with general contractors added to the report. The 2019 study, conducted by Rabbet (formerly Contract Simply) through a partnership with Procore Technologies, collected data from general contractors and subcontractors to evaluate the rising costs of slow payments in construction. Rabbet’s results show the average 51-day payment turnaround is particularly hard on subcontractors, and that the delay increases overall project costs by more than 5%. While the report focuses primarily on the impacts suffered by subcontractors as a result of slow payment (which impacts include the cost of floating payments, higher risk of bankruptcy, and other challenges), general contractors face the same issues, in addition to the burden of mitigating secondary effects such as added project costs and delays.

The study, which surveyed nearly 200 general contractors and subcontractors across plumbing, mechanical, engineering, HVAC, and electrical trades, found the following:

  • 73% of subcontractors wait longer than 30 days for payment, with 30% of subcontractors’ payments being delayed more than 90 days.
  • 54% of subcontractors incur financing charges while floating payments, with the largest source of financing being business savings, followed by lines of credit, credit cards, personal savings, and retirement savings. The study estimates the overhead included in subcontractors’ bids to finance these charges represents $40 billion in costs.
  • 28% of subcontractors reported work delays or stoppages and 30% reported filing a lien due to a delay in payment in the past year.
  • Over 70% of subcontractors would offer a reduced price in exchange for payment within 30 days, offering an average 3.7% discount (an estimated $44 billion savings) for payments made within 30 days.
  • 95% of general contractors recognize value in paying subcontractors faster, and nearly 75% reported paying some of their subcontractors at least once a month, if not more frequently.
  • 35% of general contractors incur financing charges while floating payments, with the largest source of financing being business savings, followed by lines of credit, credit cards, personal savings, and retirement savings. The study estimates the overhead included in general contractors’ bids to finance these charges represents $24 billion in costs.

Subcontractors estimate the cost of floating payments adds over 3% (representing a $4 billion excess) to total project costs, and general contractors surveyed estimated an additional 2% (or $24 billion excess) increase in total project costs to float payments. Slow payment not only increases project costs but is also a factor that 76% of subcontractors report considering when deciding how much to bid on a project, with 63% of subcontractors report not bidding on a project in the past year because of the owner or general contractor’s reputation for slow payment.

While the federal Prompt Payment Act, 31 U.S.C. §§3901, et seq., addresses payment on federal contracts and nearly every state has enacted similar prompt payment acts with respect to public contracts, only about 35 states have enacted prompt payment statutes with respect to private construction contracts. Updates to leading industry agreements reflect further efforts to fill gaps in the law and address payment issues. For example, the AIA’s 2017 update to the A201 General Conditions allows general contractors to demand evidence of the owner’s ability to finance the project, both before and during the general contractor’s performance of the work. The update also expressly allows general contractors to recover overhead and profit on work not executed in the event of an owner default, and requires the owner to pay a termination fee, including costs attributable to the termination of subcontracts, if it terminates for convenience. The ConsensusDocs’ recent update to the CD 200 General Conditions likewise requires additional payments (including compensation for reasonable attorneys’ fees and costs) in the event of termination for convenience. The CD 200 now requires the owner to pay the contractor for on-site materials paid for by the contractor, if the owner wishes to use the materials after termination, and removes the conversion of a termination for cause to one for a termination for convenience (meaning the owner is liable to the contractor for damages arising from a wrongful termination for cause). The updated agreement also obliges the owner to accept or reject payment applications within 7 days of receipt and requires the owner to make payments of accepted amounts within 20 days of the owner’s acceptance of such charges.

The bottom line is that, while subcontractors and general contractors continue to bear the increased primary and secondary costs for slow payment, owners also risk increased project costs, in addition to the risk of mechanic’s liens and project delays and shutdowns, in failing to make timely payments. Despite federal and state laws and industry standard agreements’ efforts to combat the problem, the issue of slow payment continues to drive increased project costs for all parties. Until an industry-wide solution is reached, payment should be seriously considered and addressed by all parties prior to commencement of construction.

Rabbet’s full reports can be accessed using the following links: 2018 Construction Payments Report; 2019 Construction Payments Report.

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