S l o w P a yJim Olsztynski
No doubt many of you reading this are “Type A” personalities like me. Type A behavior patterns are characterized by impatience and aggressiveness. We hate to wait, love to take charge, and are prone to multi-tasking and workaholism. Delays in anything drive us batty - although that’s redundant, since Type A’s are considered to be batty by definition.
Most contractors are Type A. Must be, otherwise nothing would ever get built. Somebody has to cut through construction’s legal and bureaucratic rigmarole that prevents anyone from actually doing anything productive. Type A’s are the ones who finally take charge and see to it that a usable structure takes shape.
Nonetheless, even our industry’s most energetic Type A’s cannot escape the black hole of inertia at the center of construction’s financial universe. No other industry that I’m aware of has such an ingrained culture of slow pay throughout.
We live in a world of electronic payment transfers at close to the speed of light. Millions of people pay their household bills online. Credit cards allow businesses almost instant access to cash from transactions, and almost every business accepts credit cards nowadays. Many utilities and credit card companies are going away from 30-day grace periods and insisting on due dates within a couple of weeks or “upon receipt.” In many cases they sting late payers with finance charges. In virtually every part of the business world except construction, payment cycles are speeding up, because most businesses actually take cash flow seriously.
Then why, oh why, does it typically take construction contractors months to receive their money for services rendered on time? OK, so there’s a 10 percent retainage tradition to make sure everything gets done in a workmanlike manner. So be it. How about the other 90 percent of billings? Why can’t progress payments get collected within days rather than months after the work gets completed?
Data from the American Supply Association shows collections for plumbing wholesalers average 48 days. That number has been creeping up rather than going down over the years. Wholesalers specializing in commercial accounts would feel like they’ve gone to heaven if they could get paid within 60 days. Most wholesalers tell me fewer than 10 percent of contractors pay within 10 days, meaning 90-plus percent forego free money stemming from the traditional 2 percent supply house discount. Some distributors have trimmed it to 1 percent or done away with the discount altogether because so few customers take advantage of it.
I realize that subcontractors have little control over this situation. You rely on the builder or GC to pay you, and they withhold payment until they get paid by the owners. It would be in the interest of all construction players to speed things up.
Subs aren’t entirely blameless, though. Many take weeks or even longer to submit their invoices for completed work. They have succumbed to the culture of slow pay, like lifelong welfare recipients who know no other lifestyle and fail to comprehend ways to pull themselves up by the bootstraps.
A bigger problem is that too many contractors fail to provide enough capitalization for their business. They depend on draws to meet payroll and pay suppliers. When payments are slow, supply houses get stretched, paychecks delayed and withholding taxes shortchanged. The contractor may make good on everything when a progress payment finally comes through, but then begins another slowdown until the next one. The situation grows worse when the contractor cuts margins just to keep booking jobs. Then there’s never any cash left to cover expenses over the horizon.
Profitable contractors can tap into short-term bank loans to cover cash flow gaps, but lenders shy away from people whose finances are stretched to the limit. So some contractors end up tapping personal credit cards, whose interest gouge just makes matters worse. Many contractors end up sacrificing their own paychecks for long periods - a noble practice but a hard road to business success. Less noble contractors will shortchange employees, materials and workmanship.
Progressive residential service contractors have broken with the industry’s slow pay tradition by making all jobs C.O.D. via check or credit card. Maybe that’s not practical in the construction world, but it’s time for some sort of cultural revolution to speed things up.
Time is money, or lack thereof.