“Built for speed” is one thing construction payment is definitely not. If you have it, you’re holding it. If you don’t have it, you’re trying to run on a tight rope. At any given time every player on any construction project is doing one or the other. Sometimes payment is a big problem, but usually, it’s just a big nuisance. It’s never not a factor. At the very best it’s a risk, cost, and time-adding productivity drag. The average accounts receivable (AR) for the construction industry is an abysmal 66 days.
Recently, I spoke to a large subcontractor who had decided he was in his last year of doing business. He prophesized that the construction apocalypse would come in five years. “Time to cash out.” He was done being sandwiched between chasing his money and pressure from material providers to be paid. He just wanted to build. The data worldwide supports his frustration. His prophecy? Maybe not so much.
Building something, anything requires many organizations to come together, at least on the first day:
The funding institution will have all their processes in place, the owner’s contracts will clearly communicate their objectives, the plans and specifications will have been signed off on, the contract will have been awarded and subcontractors will already be on-board. The synergistic planning part is done, and everyone is on the same page; they all envision an on-time and under-budget project.
Then comes the reality of the construction world:
92% of owners report their projects did not come in on time, 85% reported they were over budget, and 75% say both. 55% of contractors, on the very same projects, viewed themselves as highly efficient. There’s a disconnect, and cash flow is a likely factor. If “cash (flow) is king,” our king has been in poor health for decades.
The rate of output per unit of input (productivity) for the construction segment has not improved in 80 years. In fact, productivity has declined since the 1960s. I’ve been in this industry for almost half of those years, and I’ve heard a lot of different poor-productivity excuses. They always seem fairly reasonable on their face, but they never quite reconcile with all the facts.
If cash flow is the input needed to fuel the rate of project delivery output, it sure seems reasonable to conclude that productivity is not poised for a boon. There’s an opportunity here that some tech companies are scrambling to capitalize on. A number of these companies are selling technology to expedite the payment application process by a few days for one, or maybe two, of the links in the project payment chain. They may well deliver a couple days of AR benefit, but even the second worst industry in the world is 19 days better than construction. There remains a gigantic productivity-improving opportunity for every day of cash flow progress.
The penalties of lengthy AR without adequate working capital are very high five-year failure rates and inadequate trade credit from material providers trying to manage their risk. Inadequate trade credit means access to materials can be constrained and less competitively priced. None of this helps to improve supply chain efficiency with manufacturers. Construction payment must be rethought entirely – or remain satisfied with its profit-robbing flaws.
Financial institutions that provide construction capital need to consider the untapped power of the funds they’ve committed to each project. As the trusted funds guarantor they are perfectly positioned to provide the financial-bedrock necessary to eliminate their own risk and greatly increase customer value. With the right tools, they could leverage their power-position to mitigate our industry’s long AR, limited access to working capital, and poor productivity. They could assure every dollar designated for a project doesn’t leak out of the payment chain to be commingled with other projects. The funder’s absolute authority to establish the overriding cash flow rules and conditions on the project could be set to supercharge funds control between all the players in the chain. Settings to reduce risk, improve performance, and increase profits for oversight, work, and material providers would lower project-cost to the funder’s customer without changing freedoms, authorities, or responsibilities of each provider’s role in the chain. Theoretically plausible, but how?
Blockchain technology was built for securely addressing complex problems with user controls that cannot be broken. The next generation of Blockchain technologies are already being applied to business processes with long, broken chains. Many experts see the built environment as one of the very best potential applications. Blockchain strengths are eliminating risks and converting embedded disadvantages into free-flowing advantages. Companies like IBM, JP Morgan Chase, and others are leaning into the space. Construction is unique. It needs Financial Technology (FinTech) to provide the spark. The right combination of Blockchain and FinTech can separate many levels of burden from construction payment, align interests, and share gains. Maybe so. We will see.
We must take on the cash flow challenge. It’s right, it’s smart, and it’s needed. After all, the construction apocalypse is just 5 short years away.