Fixing construction’s payment problem
In October of last year, Ontario became the first Canadian jurisdiction to make prompt payment on construction projects legally mandatory. Other provinces are expected to follow, and a federal statute mandating prompt payment on federal government contracts has been approved and is awaiting ratification.
The action is in response to industry pressure to take on the late payment problem that has plagued the industry for decades. According to PWC’s 2019/20 Working Capital Report, the average time it took a contractor to get paid in 2018 was 83 days.
Prompt payment legislation will impose some much needed payment standards and discourage unfair practices such as withholding excessive payments unjustifiably as a pressure tactic and putting cashflow pressure on the subcontractors.
“GCs have historically had a very heavy hand to get their way with subcontractors,” says Glen Anderson, vice-president of Finance and Administration for Buildings at Edmonton-based PCL Construction. “To give you an example, a contractor may withhold a million dollar payment on a subcontractor for a $50,000 issue just to get their attention. But that creates immense cash flow issues, and can force smaller businesses into bankruptcy for unfair reasons. So prompt payment is really to add a degree of fairness to the treatment of subcontractors by generals, and also by owners.”
The topic is not an easy one for many in the industry. “There are a lot of people who don’t want to touch this subject,” says Jas Saraw, vice-president, Canada, at Procore, “because it provokes a lot of emotion for obvious reasons. It’s people’s livelihoods.”
As Saraw points out, late payment may not be intentional, but the result of inefficient and complex payment processes. “With myriad stakeholders that you have in construction, it becomes very challenging to manage all of the relationships and the payment obligations,” he says.
The persistence of outdated processes compounds the problem. “Construction is a fairly traditional business with manual processes, manual workflows,” says Mike Milligan, director of Global Marketing for Portland, Oregon-based construction software provider Zuuse, “so it’s pretty human capital intensive in terms of back office management.”
When the work piles up, the back office becomes a bottleneck. “If you’re a general contractor and you’re managing a $200 million project, you might have 150 subcontractors,” Milligan says. “So imagine the number of applications for payment you’re going to see over the course of that project. It gets very hard to manage, and that’s one of the reasons late payment is such a big issue.”
The existing and pending legislation specifies time frames for payment or notification of dispute, and requires general contractors to keep an audit trail of all matters related to payments. This may well be the tipping point where contractors decide that manual processes are no longer viable.
The Canadian Construction Association’s president, Mary Van Buren, is confident technology vendors will step up. “What we find,” Van Buren says, “is that when there’s new legislation or opportunities, then an ecosystem will form in the technology sector to help the contractors with their issues or opportunities.”
The CCA is developing courses to help contractors understand and comply with the legislation.
RECONSTRUCTING THE PAYMENT SYSTEM
Payment software is a specialized product that is typically integrated with construction workflow and accounting platforms. One payment software vendor is the Zuuse product GCPay, which provides a complete workflow environment for managing payments to subcontractors. The software is a cloud-based system that provides a portal for subcontractors, who, instead of invoicing, access the portal to apply for payment.
“If I’m a subcontractor and I’ve completed a certain percentage of the work in a project,” Milligan says, “I can submit an application for payment for that work. It can be created, submitted, managed, and reported all online. It automates the whole process.”
An attractive feature of the software is that it manages lien waivers alongside payments, making it easy for a contractor to manage all aspects of the subcontractor relationship on a single platform. This is particularly important since Canadian legislation combines mandatory scheduling of payments with the legal adjudication process.
Payment, however, is not an isolated function, but one dependent on access to job site data to verify that the subcontractor has delivered according to contract. “A lot of things payment-wise will be tied to deliverables,” Saraw says. Contractors therefore need to have job management systems in place to capture and present this information. Obviously, this becomes more critical in case of a dispute.
PCL took on the payment automation issue 10 years ago when Anderson led a team that created PCL’s platform based on an application called Textura. That product was subsequently purchased by Oracle and branded Oracle TPM.
“Overall, we are viewed to be good payers in the industry,” Anderson says. “We want to maintain that because our subcontractors are our construction partners, and we need to work together to make sure both of us are successful.”
The new platform has allowed PCL to maintain its payment standards with much less manual work. “It removed a substantial amount of data entry required when processing payments,” Anderson says. “It’s also more transparent than the old mailing in the invoice or emailing the invoice and adjustments being made without the subcontractor’s knowledge.”
The system also ensures that if there is a challenge to an application for payment, that gets communicated immediately. “If a subcontractor applied for a payment of $200,000 this month for work they have performed, the project manager would go through and validate that. If there’s an adjustment, that would be communicated the next day to the subcontractor. So that aligns with what is now required under prompt payment legislation.”
While the new system means less work for subcontractors and assurance of prompt payment, it may not be easy for them to discard their old invoicing practices. “I think every human has a challenge with change,” Anderson says, “and this is by far the biggest change in the invoicing process in construction ever. We’re going from each subcontractor having their own accounting system and running invoices at month end and what have you, and then scanning, faxing, emailing, depending on the technology of the day. Now they go online onto our platform and develop their invoice through an electronic application process.”
Anderson notes that online payment platforms are becoming more prevalent in other industries, and may well be becoming the new normal. “For a lot of our clients in the industrial world, we have to go online and do a similar type of process,” Anderson says. “So it’s becoming more common. But the construction industry usually lags quite a bit, at least in the accounting technology.”
While many general contractors will feel pressured to automate their payment processes in order to comply with the pending legislation, Anderson suggests that they choose their technology carefully. “There’s certainly no shortage of technology that people can adopt,” he says, “and it changes so rapidly that if you’re going to make a commitment to technology, you want to make sure it’s going to be a lasting technology so that you’re not changing platforms every two years.”
Jacob Stoller is principal of StollerStrategies.
This article first appeared in the October 2020 edition of On-Site. Click here to read through the whole issue.