Article
Written by Will Aitkenhead
Posted on 26/08/2015

How to solve the issue of late payments within the construction industry

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 In the construction industry many parties in the chain feel that the process is unfair, which generally means that it is. But how this perceived ‘unfairness’ affects different portions of the chain normally depends how far away a party is from the money. The further away you are from the top of the chain the more removed you are from the cash, which in turn means you are at greater risk from late payments.

Everything is linked

To understand the late payment issue, it is also important to consider other problems with the construction industry. Parties at the bottom of the chain, such as suppliers, subcontractors etc, could suffer from the following issues:

  • Late payments
  • Bullying from those above them who have more leverage
  • Risk-shifting mechanisms
  • Unfair debt waivers
  • Difficult processes to make use of the available protections

At the top of the chain, the following problems may occur:

  • Lack of visibility
  • Poor quality of work
  • Having to ‘babysit’ lower tiered parties
  • Hidden liens and debts
  • Double payment

It is critically important that those at the bottom of the supply chain understand and care about the complaints of those at the top. Only when this happens can the payment process be straightened out and the problems of late payments reduced.

Visibility

One of the central issues with having a fair construction payment scheme is a clear lack of visibility. To enable an owner of a business to make sure the supplier is paid on time, they need to know that that particular supplier was working on that specific job. By introducing pay-if-paid or pay-when-paid clauses, the pain that suppliers face from late payments can be eased.

Another way that the visibility issue can be solved is by making sure preliminary notices are sent on every project and to all parties in the payment chain. This will not only ensure visibility at the top but also security at the bottom.

Use the technology

Historically, sending preliminary notices may have been difficult logistically but with the advent of technology it is now relatively simple. Tracking and managing notice requirements has been made immeasurably easier by new software that can decode and streamline the security requirements.

Top-of-chain companies will track those that send preliminary notices, enabling them to prioritise invoices. If you don’t send a preliminary notice, you give them an excuse not to pay you on time.

Research by Mechanics Lien and Construction Payment Platform company Zlien has indicated that the average DSO is 71 days for projects where no notice is sent, compared to just 33 days when a notice is sent.

Greater bargaining position

Lien waivers are a document from a contractor, subcontractor, materials man, equipment lessor or other party addressed to the construction project claimant declaring that they have received payment and therefore waive any future lien rights to the said property.

These can create problems however when those at the top of the chain leverage their greater bargaining position to obtain what are known as ‘over-reaching’ lien waivers. This includes:

  • Incorrect or legally insufficient forms
  • Waiving more than has been contemplated
  • Over-reaching waivers for the promise of payment

Those at the bottom need paying quickly and those at the top want to avoid lien claims and double payments, and these two desires intersect at the lien waiver document. But there are several aspects that could be improved, including:

  • Having conditional waivers with every pay-app or invoice
  • Automatic conversion of conditional waivers to unconditional waivers when payment takes place

By using a conditional waiver instrument, all parties can avoid the hassle and wasted time of a third-party type situation. It also helps to promote fairness, transparency and better relationships between all parties.

As you can see this is a complex process, but that doesn’t mean that unfairness has to prosper. With some careful planning and greater understanding you can help prevent issues caused by late payments.

For more information on late payments, visit our wikipage