The construction segment is at the rocky bottom of all segments worldwide for access to working capital and length of accounts receivable, according to Pricewaterhouse Coopers’ Annual Global Working Capital Survey. However, industry stakeholders seem to report making money. How do they do it? They must be holding money for longer periods of time.
In fact, accounts receivable has nearly doubled since the early 1970s and, per census information, so has the time needed to build the same two unit residential project. There have also been no segment productivity improvements in 80 years. An overwhelming majority of owners currently report projects being behind schedule and over budget, and an almost equal number of contractors see the industry as efficient or highly efficient.
How do you reconcile that owners see prolific performance failure and contractors perceive the same projects as highly efficient?
Some major banks recently pulled out of construction and renovation lending because they do not see enough profit in comparison with the amount of extra work required to protect the asset being built—in part due to new banking regulations. Those still funding construction use slow draws and other manual processes to assure their asset is fully protected. And, of course, there is no bank-interoperability with construction processes to improve efficiency. In fact, there is very little interoperability anywhere in construction, which some experts say accounts for 25 percent to 40 percent waste. When comparing construction loans to all other types of loans that banks could sell, banks can be added to the list of industry stakeholders holding the money.
Technology could solve some of these problems, but adoption, standardization and getting consensus would need to be taken seriously; or a technology solution would need to be compelling enough to attract everyone with enough individual advantages for each stakeholder. The users would need to see a clear win with the solution as well as a bit of potential loss to competition without the solution. The solution would need to have a lot in common with every one of the project stakeholders.
Payment is one thing all construction has in common, so that commonality probably makes financial technology the top contender to penetrate construction.
Investopedia defines Financial Technology, also known as FinTech, as “any technological innovation in the financial sector.” Construction’s clearly flawed payment processes and resulting financial disadvantages are problems made for a smart FinTech solution. Beyond the main working capital and accounts receivable problems is a layer of secondary financial problems that further inhibit performance and increase prices on all projects, probably on every line item.
The right software can help keep promises to pay, add transparency, meet any variation of complex conditions between the business pairings on project payment chains and even supplant much of the need for risky trade credit carried by material providers. It may even add interoperability between the project stakeholders.
To succeed in construction today, it is becoming clear that industry stakeholders must be good at what they do, very good at getting paid and ok with holding the next guy’s money a little longer. The companies that have succeeded in the past credit their disciplined stockpiling of cash from assertive collections over time and smartly managing the working capital passing through their accounts as their differentiator.
Will that be enough going forward? Is the labor shortage possibly a byproduct of the industry being too difficult to survive in? Why would young people with apparent career choices enter an industry with obstacles that other industries are not encumbered by? Maybe there are still more questions than answers, but one thing is clear: construction payment processes can only go up from here.