It’s no secret that the construction industry faces difficulties in payment and associated problems related to cash flow management.
For that reason, accounting procedures for construction industry participants are very important. The failure rates in construction are high and the margins are low, so anything that throws a wrench in how the payment process works can result in unforeseen difficulties or disastrous consequences.
Why Procedures Matter
Construction industry businesses work on tight margins, and to add complexity to the issue, are often required to float significant project costs. Typically, payroll is due every two weeks and materials suppliers demand payment on receipt, but payment from upper-tiered parties only comes much later, which makes cash management so incredibly important. Without strong procedures in place to smooth these edges, provide actionable information and give insight into the business’s cash position, the company can be in a world of hurt.
Further, a construction project is not a transaction realized at a concrete point in time. Long projects, extended contracts and change orders mean that a firm understanding of when profits are realized is difficult. And again, this means set procedures are necessary for the financial health of the business.
In order to best position the company for continued success and to best manage cash flow, construction companies have set procedures, timelines, entry methods and more for everything finance related. However, mandated use of construction payment applications, while beneficial to the general contractor on the project, can create havoc for subcontractors or other lower-tiered parties.
Construction Payment Applications Mandate Their Own Procedures
Construction payment applications, such as Textura, GCPay and CAPS, are designed to streamline the construction payment process. However, the way most construction payment software applications “streamline” the process is by mandating (or allowing the general contractor to mandate) specific procedures, processes and requirements that may not line up with those of the parties needing payment.
Unfortunately, making the process easier for general contractors can have the opposite result for subcontractors. The American Subcontractors Association has noted that one payment application “allows general contractors to be unduly rigid in the processing of payments, and user experience is often that the generals blame the system and use it to delay issuing payments. . .” In an industry where margins are razor thin, the mandated procedures of a payment application software product resulting in slower payments (in the face of a subcontractor’s own procedures) can be devastating.
Construction payment software applications are a great concept for getting paid faster or storing documents and information in the cloud, but they can be less game-changing in practice. Fair construction payment is key, by not allowing one side of the payment equation to set all the rules and procedures at the expense of the other parties on the project.