Stakeholders in the AEC space are all too familiar with submitting and receiving progress payments based on the gold standard metric, WIP. WIP - or “work in place” - is the amount of progress made on a project which entitles the contractor to payment.
Unfortunately, industry veterans are also quite familiar with payment lags that span well beyond a "typical" 30-day payment schedule. In fact, some reports indicate the current payment lag in 2024 is 94 days on average.
In the typical process, a contractor will set up a Payment Application which provides a line item breakdown of project spend. The document tracks total anticipated spend, previously completed, and current WIP. Each month, the payment application is submitted as a draft, or “pencil draw,” approved, or revised then approved by the relevant stakeholders, prior to its formal submission. Then, depending on the terms of the contract and accounting for potential delays in the process, payment comes along some 30-90 days later. Accounting for an average net 30 payment schedule, that extra (up to) 60-day payment lag window is FinTech’s glaring opportunity to provide value to the industry. Business doesn’t stop, and neither do the bills. Payroll, overhead, and other critical expenses then have to be paid by some other means while cash flow sits in flux. It is then no surprise that FinTech has seen over $750M in venture capital money in the construction space alone in the last three years.
The fintech industry eclipsed $250B in revenues in 2022, and with a projected growth to over $1T by 2030, there are no indications of a slowdown. Dating back not too long ago, credit cards and ATMs were some of the first forms of modern day financial technologies. Since then, the rise of the computer and the internet have hastened the coming of new opportunities in the FinTech sector, for example with the invention of PayPal in the early 2000s. As technology has continued to evolve, FinTech solutions continue to segment into different categories including Baas, financial operations, payments, lending, insurtech, and more. Though now taking on many different forms, the opportunity for these solutions, particularly for the construction industry, boils down to three main drivers: access, accuracy, and speed. Through each of these benefits, builders can mitigate the damages caused in that 60 day window
Let’s review the three prime benefits of FinTech solutions and how they can seize this opportunity.
Access
The banking industry, much like construction, is not historically known for its ability to be nimble and innovative. Much of the banking sector relies on historical methods and data, which are in particular not helpful for the construction industry. FinTech lending solutions tailor-made for construction allow in particular SMB enterprises to maintain a competitive seat in an industry with over 700,000 contractors in the United States alone. While financing a project or part of the business on credit is not free, it is a particularly valuable tool if used wisely as a means to support project expenses, particularly in the early days of a project when cash flow is at its lowest point. FinTech solutions purpose-built for the construction industry can utilize better understand the right data points to measure to calculate risk and terms, and provide a more potent solution for those that need it.
Accuracy
A significant issue in the payment application process is compiling accurate and complete documentation to support the invoicing requirements. Struggling to prove and agree on the actual WIP numbers, compiling supporting documentation that correctly ties to the billing numbers, and submitting all required lien waiver documentation can add days to weeks to the invoicing and payment process. Particularly on mega-projects that require thousands of pages of support and complete data sets, this is a grueling process that requires many hands and a significant manual effort. Digitizing and automating this process in a way that provides transparency and accuracy between all parties can remove these critical roadblocks from the process, ultimately having a significant positive effect on project cash flow.
Speed
It is astonishing how much of the industry still picks up a paper check at the end of a payment cycle. The process of cutting a paper check, putting it in the mail or waiting for a courier to transport it, and then process the payment with the bank costs precious days. Electronic and automated workflows can significantly reduce wait times related to communicating documentation, approval requirements, and payment releases. In addition, each stakeholder has visibility into the payment process at the tip of their fingers. Then, taking it a step further, tracking and reporting activities also take place in real time, affording stakeholders continuously accurate information on their projects.
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