Slow payments cost US construction industry US$64 billion in 2019: Rabbet

It takes 51 days on average for most companies in the construction industry in the US to get paid, the longest days sales outstanding of any industry in the country, according to a report by construction finance software platform Rabbet.

Days Sales Outstanding (DSO) is the number of days that receivables remain outstanding before they are collected, and this represents how effective a company is at getting paid by their customers.

With 51 days sales outstanding, the construction industry is suffering costs of US$64 billion in the form of fees and other costs, according to Rabbet.

Rabbet said subcontractors have to bear the greatest direct cost for slow payments. This is because cash is the fastest to flow out of these businesses, yet they are the last to get paid.

Subcontractors have to pay wages on a weekly or biweekly basis, and buy their materials on 30-day invoice terms. But they have to wait an average of 51 days for cash to flow into their businesses - three out of four contractors report waiting longer than 30 days to receive payments, with one in three waiting longer than 60 days.

This gap in cash flow means subcontractors have to turn to many sources of financing to pay wages and purchase materials while waiting for payment from the general contractor. Only 39% of subcontractors report they are able to rely on their balance sheet, while the rest use a line of credit (36%), credit card (22%), personal savings (15%), and retirement savings (6%).

This situation has resulted in 21% of the subcontractors saying they would choose not to bid on a job due to cash flow concerns. This is despite the current cheap access to capital.

76% of subcontractors report considering a customer’s reputation for slow payments when deciding how much to bid on a project. 63% of subcontractors decided not to bid on a project because of a general contractor or owner’s reputation for slow payments. An owner’s reputation for slow payments threatens the general contractor’s ability to earn competitive bids, and this challenge is further compounded in a tight labor market. Getting the best bids from the best contractors is essential to managing project costs and schedules.

The study is based on how 184 general contractors and subcontractors across the US managed working capital, bidding decisions, and project risks in the face of slow payments during the last 12 months.