Data shows 1 in 5 construction companies has a cash flow problem
Nearly everything about working in construction is a challenge. The work is hard, the hours are long, and just getting paid on time can be a struggle, according to a recent survey conducted by TSheets and zlien. With so many of our clients in the construction business, we were interested to know how often construction companies experience cash flow problems and what impact it has on their business.
The people behind the data
We surveyed 195 construction company owners and managers between January and April 2018.* Of those, the vast majority (76 percent) worked in commercial construction, while 20 percent worked in residential construction, and 15 percent worked in remodeling. Some companies had a crossover. Smaller groups of survey respondents checked the boxes for construction supply companies, excavation and equipment, restoration, landscaping, and more.
Which construction sector do you work in?
Most of our respondents (87 percent) worked for or owned a company of 50 or fewer employees. The majority of these (54 percent) actually cited 15 employees or fewer.
How many employees does the business have?
How useful are incentives and penalties?
In an effort to get paid on time, more than a third of construction companies (39 percent) say they incentivize early payments or penalize late payments or both (57 percent say they don’t use any incentives or penalties).
Unsurprisingly, companies were four times more likely to penalize clients for late payments than offer incentives for early payments, with 23 percent of respondents saying they add interest when not paid on time.
Do you use payment incentives or penalties?
Whether construction companies use honey or vinegar to coerce customers into paying them on time, the fact remains the vast majority of companies don’t get paid when the bill is due. In fact, when asked how often they are paid on time, only 8 percent of our respondents said “always.” A much more robust 61 percent answered “usually,” and 27 percent said “rarely.” Most surprising was the 4 percent who answered “never.”
How often do your clients follow the agreed payment terms?
So when do construction companies get paid?
While payment in full might not always come in on time, most companies (63 percent) say they do receive some payments regularly or in advance. More than a third report receiving payment only after the project is complete. That’s a heavy burden to bear for companies that must pay for supplies in advance and take care of employee payroll throughout.
Among those companies that received payment after the fact, most reported being paid 30 days after completion, followed by 10 day and 60 days.
Most common payment-after-completion terms
The cash flow struggle gets real
It’s no surprise late payments promote cash flow problems. For 19 percent of respondents, cash flow is a constant problem, while another 17 percent say they experience cash flow problems once a month. Worryingly, only 13 percent of respondents reported never experiencing cash flow problems.
How often does your business experience a cash flow problem?
Cash flow struggles are a harsh reality for the majority of construction companies, and unfortunately, those problems often bleed into future goals. One in 4 respondents says their cash flow problems are preventing their business from growing. Other notable problems connected to cash flow included the company’s ability to run payroll (17 percent) or their ability to take on new projects (15 percent).
Has cash flow ever affected any of the following in your business?
The effect on payroll
When asked how they were able to make payroll in light of a cash flow problem, the most common answer (38 percent) was “we took out a short-term loan.” One in 4 said “employees were not paid their wages,” while 12 percent said their employees quit. Some employees (5 percent) chose not to take bonuses, while another 5 percent of respondents said business owners or leaders chose not to get paid at all so employees could receive pay. Finally, 3 percent said they took out personal loans to cover the shortfall.
When a cash flow problem affected payroll, what impact did it have on the business?
*TSheets welcomes the re-use of this data under the terms of the Creative Commons Attribution License 4.0, which permits unrestricted use, distribution, and reproduction in any medium, provided the original source is cited with attribution to “TSheets.”
Have cash flow problems ever threatened the success of your construction company? Let us know in the comments below!