Working capital is the fuel that propels progress at every turn of a construction project, from site preparation to project completion. Should capital slow to a trickle, contractors don’t receive payment required to optimize their performance. The same holds true of subcontractors, sometimes prompting work to slow to a snail’s pace. And time, as the saying goes, is money.
Unfortunately, payment delays are more common in construction than many industry members realize. In fact, construction ranks at the bottom of all industries worldwide for access to working capital and length of accounts receivable, according to Pricewaterhouse Coopers.
To address the issue, Troy, NY-based start up BuildPay has developed an electronic, cloud-based software
platform that links all project members in the construction chain and facilitates prompt payment to each, with funds transferred directly from a bank escrow account into their bank accounts as work is completed. “When a contractor or subcontractor sign up for a job on the BuildPay system they link their bank account with their profile,” explained BuildPay CEO and founder Steve Wightman. “Then, an owner or project manager can deposit money directly into their account.”
Seeds for the system were sowed after Wightman, then employed by a property insurer, traveled to Florida in 1992 in the wake of Hurricane Andrew to survey the conditions of several schools for which his company provided coverage. “It was chaos,” Wightman, recalls. “The reconstruction challenge was endless. And the trade credit, working capital and systems in place to fund the fix were non-existent.”
What follows is a discussion of the technology Wightman and his colleagues designed to ensure prompt payment and the circumstances that warranted its development.
BW: What causes cash flow problems on projects and what are the consequences?
Wightman: As we know, a developer or owner typically releases funds to the contractor for work completed over a period of time and the contractor in turn releases funds to its subcontractors for work performed over that period. Problems occur when, say, a bank or lender is slow to release funds to the developer or the contractor is slow to release funds to the subcontractor. In some instances, payment from an owner may be slowed if it is distributing funds through an agent or multiple agents. In the contractor’s case, working capital is so precious that the company may hold on to funds it owes the subcontractor as long as possible to maintain operations on the project as well as other projects. As a result, the subcontractor may have difficulty paying for materials or move workers to projects for which they do receive prompt payment from the contractor. Bottom line: The job slows when everyone has less working capital.
BW: How does BuildPay address the problem?
BuildPay financial technology attaches to the owner’s or lender’s bank escrow account, incorporating a rules-based engine, or set of conditions, for dispersal of funds from the account. This facilitates prompt payment to all parties up and down the chain and mimics how construction works today.
BW: How does the platform work in practice?
Wightman: All parties, from owner, contractor, subcontractor and subcontractor’s subcontractor are pre-registered for payment. To receive payment, the contractor employs BuildPay after invoicing the owner or developer. Upon approval of the owner, BuildPay immediately distributes payment. If the amount is $1 million, of which the contractor is owed $200,000 with the remaining $800,000 evenly split among four subcontractors, funds will be distributed accordingly. The contractor receives only the money it is directly owed, with the remainder distributed directly to the subcontractors.
BW: Are funds placed in buckets in accordance to categories such as labor and materials?
Wightman: Yes. The categories are as follows: overhead, profit, labor and materials. If the project team has designated a certain amount of funding for materials, those funds are held specifically for that purpose, so that they aren’t allocated for other activities. With materials, we’ve closed the loop by issuing subcontractors a debit card that directly draws funds for corresponding funds residing in escrow. Rather than rely credit, the subcontractor pays for materials at the time it receives them.
BW: Given the novelty of the debit card, are some material suppliers skeptical and reluctant to accept it?
Wightman: BuildPay connects to material providers on a project by project basis. Thus far, we’ve completed one project – a residential roofing project in Syracuse, NY, and the suppliers were very enthusiastic. They love the concept of immediate payment, and on several pilot programs we’ve engaged in we’ve found they often will negotiate a lower price than for materials purchased on credit. So it’s a win-win for the entire project team. On the Syracuse project, the project team completed the job for 19% less than originally anticipated. As we grow, we anticipate the BuildPay debit card will become the standard for construction.
BW: Does BuildPay require participation of all parties involved in a project in order to execute it properly?
Wightman: It does. But we don’t believe consensus is difficult to achieve. The good news is that there is a lot of interest from the top down (like banks and owners) that parties farther down the chain be promptly paid in order to maintain project schedules. There’s also a lot of enthusiasm from the bottom up among subcontractors and material providers that don’t hold large reserves of funds and are pressing contractors to be paid. In the middle, contractors win with projects that cost less and move faster. Put all parties involved in a project in the same room and we believe we’ll achieve the consensus required to succeed.
“IF THE PROJECT TEAM HAS DESIGNATED A CERTAIN AMOUNT OF FUNDING FOR MATERIALS, THOSE FUNDS ARE HELD FOR THAT PURPOSE, SO THEY AREN’T ALLOCATED [ELSEWHERE]”
– Ryan Cialdella, Vice President, Research and Development, Ozinga