According to a new Construction Payment Report from Levelset, more than 1 in 3 contractors say they have yet to change any of their business practices in response to COVID-19. The report is based on a Levelset survey of more than 600 construction professionals, conducted in August of 2020.
In the months following its initial outbreak, the coronavirus pandemic upended the construction industry across the country, shutting down or delaying projects. Even where construction was considered an essential service, contractors faced financial strain from stalled funding and slow payments.
Industry response to COVID-19 varies
Though slow payments have long plagued the construction industry, the coronavirus forced a surge in disputes. From February to April, during the initial wave of the virus, mechanics lien claims jumped as much as 63% as construction businesses raced to free up cash flow by collecting on outstanding accounts. Yet, even amid a rise in bankruptcies and a dramatic economic contraction, 39% of contractors say they did not change any of their business practices in response.
While a majority of contractors say they did make business changes, the course of action varied. Nearly a third applied for SBA funding (31%) to boost cash flow in the short term. Others said they adjusted credit policies to be more selective about their customers (21%), started sending more notices (18%), or began taking their lien rights more seriously (15%). Just 7% reported filing a mechanics lien or bond claim on more projects than usual.
That a plurality of contractors neglected to take action is not necessarily a revelation, as previous surveys have shown that construction companies are relatively resistant to change. In fact, in a pre-pandemic survey, contractors showed a clear propensity to accept slow payments as the status quo.
Subs & suppliers disproportionately affected by cash flow problems
Of course, payment delays (and pandemics) don’t affect all parties equally. The survey also found that general contractors are twice as likely than sub-tier parties to get paid on time. While 36% of GCs say they always get paid according to contract, only 15% of subcontractors and 8% of suppliers say the same. As a result, sub-tier parties bear a significantly higher cash flow burden than those at the top of the payment chain.
The gap between GCs and subs widens even before a project begins, with 36% of general contractors reporting that they receive an upfront deposit on every project. Only 13% of subcontractors and 18% of suppliers say the same.
Can construction change to keep up with the times?
Just as the 1918 flu outbreak shaped the course of construction history, the current pandemic will require the industry to adapt. In 2021, contractors will face a new demographic, economic, and political landscape, shaped not only by the current pandemic, but the threat of the next one.
If the construction industry has learned anything from the coronavirus, it’s to be prepared for the worst, especially when it comes to payments. The contractors and suppliers that can change their business processes to be more resilient in the face of uncertainty will be the most likely to survive.
