For an industry already suffering long hours and grueling work, cash flow problems for construction companies is an unwelcome, sour cherry on top. And it’s not a problem that’s unique to certain types of construction. It’s a widespread epidemic that leaves many business owners scrambling to pay their employees, themselves, and their bills.
A recent survey of 485 construction industry professionals, conducted by TSheets by QuickBooks and Levelset, found that cash flow problems are a concerning trend among construction companies everywhere. The survey benchmarks financial health data on the industry collected in early 2018 from 195 survey respondents. The 2019 numbers indicate cash flow problems have held steady across the industry.
1 in 5 construction businesses says cash flow remains a frequent issue
The majority (61%) of construction businesses experience cash flow issues. In fact, 20% of construction professionals say cash flow is often a problem for their business. And when businesses aren’t paid in a timely fashion, it sets off a domino effect for the entire company.
“Chasing down money and asking for payment is the worst part of my business,” one respondent shared. “I loathe collecting money, especially when I truly need it.”
Unfortunately, they’re not alone. Most construction professionals (53%) indicate they’re not satisfied with how quickly they’re paid for their work.
The domino effect of frequent cash flow issues
There are more than just unpaid employees when cash isn’t flowing. Debt racks up, purchases can’t be made, and the business stalls. Business owners or managers take focus away from other responsibilities to figure out solutions to the aforementioned problems.
61% of construction professionals indicate that cash flow significantly impacts both essential business functions—like their ability to pay employees—and opportunities to grow the business.
But there is some good news.
While 47% indicated that cash flow problems have affected employee payroll, only about 1% of respondents said they’d been forced to issue IOUs to employees on payday. That’s a significant drop from the 2018 survey, which showed 25% of construction workers were not paid wages on time.
Luckily, employees not paid on time have been forgiving. Fewer than 1% of construction professionals said they experienced employees quitting due to a cash flow problem. That presents another key change from the 2018 survey that found 12% of respondents said their employees quit due to missed paychecks. This is likely good news for employers feeling the effects of a continued labor shortage, wherein average overtime rates among construction workers are around nine hours per week.
But the impact doesn’t stop at the business level. While employees might not miss a paycheck, they might miss out on personal growth opportunities. 16% of respondents said cash flow problems have affected their ability to offer pay raises to employees.
The root of the cash flow issue
So why is cash flow such an issue for construction firms? Getting paid is, unfortunately, often a challenge. And just 25% of respondents said they hand over money to vendors for labor or materials before they’re paid—the most common arrangement among respondents. Only two-thirds said they are always paid in full for their work.
For a majority of construction professionals, the battle to get what they’re owed is uphill. 64% of respondents said they believe clients look for ways to delay or avoid payment by challenging the construction business’s work. About 15% said they believe this is always the case.
And when there is a payment issue, sometimes chasing money isn’t even worth it. As one surveyed professional said, “No deal is better than a bad one.”
Short-term solutions for cash flow problems
For many construction business owners, the common solution to cash flow issues is a personal one. One in 3 says they have used their own money to cover payroll when cash was short, taking the financial hit instead of their employees.
“I’ve dipped into personal funds to keep jobs running and labor on-site while waiting on promised payments,” said one respondent. “And I’ve gone without my own money too many times.”
Next in the line as far as solutions go? A short-term loan. About 1 in 5 construction professionals said they have used one to cover payroll costs when experiencing a cash flow problem.
Some respondents shared that they’d even been forced to turn to methods like pawn shops and selling tools to get through tough times.
The good news is that there is room for improvement when it comes to practices across the industry. And there are solutions available to help relieve cash flow issues.
One way to stop problems before they happen is by making informed decisions about which projects to take on. Construction businesses can use information about past payment behavior to choose future clients wisely.
Construction professionals can also consider is implementing flexible payment plans for delinquent clients. 44% of respondents indicated they never offer flexible payment terms for overdue payments. In some cases, a partial payment may be better than no payment.
Other options include incentivizing early payments or penalizing late payments. More than half of those surveyed said they never charge interest for late payments. If payment struggles persist, construction businesses can also file liens against the unpaid work or sell the debt.
When problems arise, it doesn’t mean getting paid is a lost cause. Solutions exist for construction businesses struggling to get the money they’re owed.
For even more details on how cash flow impacts construction businesses, check out Levelset’s comprehensive 2019 National Construction Payments Report.