Are you paid on time? Do you pay timeously?
Late payments are the bane of the construction industry hurting many companies.
Some major multi-national mining companies pay their suppliers and contractors 90 days after invoice. Even large contractors habitually pay their subcontractors and suppliers at 60 and even 90 days.
Wow, they must be nuts! How incredibly short sighted! Some accountant is only thinking about the short term benefits to their company without considering damages to suppliers and contractors and the long term costs to their own company.
Imagine, some contractor completes work in the first week of April, then, they can only invoice at the end of the month and then then only get paid 90 days after that – at the end of July. In the meantime they have to pay wages probably in the 2nd or 3rd week of April, salaries at the end of April, suppliers and equipment providers sometimes have to be paid up-front but at the very latest they’ll be paid at the end of May.
Of course some of the bigger suppliers and contractors try and force these extended payment terms down the line – to their subcontractors and suppliers. A ripple effect passes through the entire industry.
Then there are many instances of state and government entities, as well as private clients paying their contractors long after the money is due. There’s often little that contractors can do, particularly if they want to continue working for the client.
Who can afford to work under these conditions? Well that’s exactly the problem because few contractors and suppliers can finance their customers. Contractors and suppliers aren’t banks! Ultimately it’s the company that imposes these poor payment conditions who’ll be paying for them.
These extended payment terms and late payments have consequences for the contractors, often sending them into bankruptcy. But, there’s also consequences for the clients as well – consequences that often cost the client more money than they think they’ve saved by paying their contractor late.
The dangers of paying your contractors and suppliers late
- Poor cash flow is the death of many contractors and suppliers. If contractors don’t have the cash to pay their employees, subcontractors and suppliers they’ll go bankrupt. Any company that has had a contractor become insolvent part way through a construction project will tell you that it leads to project delays and additional expenses to source a replacement contractor. Then, there are often additional problems of warranties and guarantees which now become worthless.
- If contractors and suppliers are bankrupted by poor cash flow there will ultimately be fewer contractors and suppliers available to price new construction projects. Less competition means higher prices for future projects.
- Many contractors and suppliers just cannot afford to carry the costs of a project for nearly 4 months. It means fewer contractors and suppliers will bid for new projects – which means less competition which drives prices upwards.
- Bigger contractors and suppliers who can sustain these poor payment terms will try and reduce the impacts on themselves by forcing them down the supply chain to their subcontractors and suppliers. Ultimately leading to some of their suppliers and subcontractors falling over when they can’t sustain the poor cash flow. Subcontractors who can’t afford these payment terms won’t submit bids. Fewer subcontractors mean less competition, resulting in higher prices which ultimately get passed onto the end customer (in this case the client that insisted on these poor payment terms).
- The suppliers and contractors that survive and are prepared to continue working for the customer will add the cost of finance into their prices. Ultimately the customer will be paying these finance costs. But these finance costs will probably be more than what the customer has saved by paying their contractors and suppliers later. The customer is often far bigger than their suppliers and contractors so is probably better able to negotiate more favourable borrowing rates with their financiers than the smaller supplier and contractor is able to.
- But, I think the most important thing about paying our contractors and suppliers on time is that it creates trusting relationships. A contractor or supplier, who is treated fairly, is paid on time, without unfair deductions, is usually more responsive and more helpful. Sometimes we made mistakes or got into trouble on our projects and had to depend on our suppliers or subcontractors to help us. In most cases they delivered because they appreciated working for us. So when a Project Manager ran short of materials or had forgotten to order an item, suppliers accommodated us and expedited the missing items to the project site. If the project fell behind and we requested our subcontractors to help out and work on the weekend to help us catch up they usually did – many times without extra costs to us. But now imagine this; you are an electrical contractor working on a project for a company that pays you at 90 days. They have an electrical problem (not caused by your company) shutting down their operations on a Sunday. Their electrician is ill so they phone you, interrupting your family barbecue, to ask if your electricians can help. Your first response is to say yes. But then you start thinking. Today is 10 April, if I send my electricians to help out today I have to pay them double time, probably even have to pay them an extra bonus incentive as well. The time sheets are closing tomorrow which means the electricians will be paid on Friday 15 April. I can only invoice the customer for their time at the end of April and then we only get paid at the end of July. No, that certainly doesn’t sound worth the trouble. So you’re probably going to reply to your customer; “Sorry I would love to help, but I remember overhearing my electricians planning a fishing trip for the weekend so they aren’t available. They’ll be out on the water now. Try another contractor – but you may find everyone’s out fishing today. Good luck.” So, where does that leave our customer? Well with a whole lot of unhappy and unhelpful contractors and suppliers. One lost day of production on their operations is worth a lot more money than an accountant saved by paying contractors and suppliers later.
- Contractors who are battling with their cash flow aren’t happy to put additional resources onto a project when they’re needed. Can they afford further drain on their cash flow? Why allocate resources to this project when they’ll only be paid after 90 days when other customers and projects pay after 30 days? You want to see a contractor or supplier jump and provide service – promise to pay them a bonus, or better still promise to pay them early.
- It’s hard to manage unhappy contractors, or contractors that are cash strapped. This makes it more difficult for those in the field who have to manage them.
We’ve always tried to look after our subcontractors and suppliers. Sure we were tough on them and deducted money when we had to do some of their work. We withheld money when they didn’t perform. But this was always within the terms of the construction contract and was never done because we wanted to make money at their expense. Unfortunately, we did on occasion make mistakes and pay the odd contractor later than we should have. However, subcontractors and suppliers knew they got a better deal working for us than with most other contractors. They wanted to work on our projects. They helped us win projects by providing keen prices. They gave us their best teams. Together with our subcontractors and suppliers we were a winning team.
Even now I pay repairmen and tradesmen as soon as I receive their bill. After all, I never know when an emergency is going to happen and I’ll need them to urgently help me out with a repair.
What do you think of customers who have lengthy payment terms or delay paying for work done?
Are you more loyal to customers who pay you promptly – helping and supporting them?
Do you pay your suppliers and subcontractors on time?
Paul Netscher has written several acclaimed easy to read construction management books for owners, contractors, construction managers, construction supervisors and foremen. Titles include ‘Successful Construction Management: The Practical Guide’, and ‘Building a Successful Construction Company: The Practical Guide’, and ‘Construction Management: From Project Concept to Completion’. The books are available in paper and ebook from most online stores including Amazon. Paul Netscher is also available to help your construction project or company. Visit www.pn-projectmanagement.com for more info.
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