On top of concerns about dwindling backlogs and an uncertain economic outlook, slow payment for work already performed is now sapping the strength of many industry firms. Across the industry, executives report pay cycles for general contractors have stretched to an average of 45 to 60 days from 30 days a year ago. Subcontractors report pay cycles in the 90-day range, roughly twice the average from a year ago.
In addition, firms say owners are increasingly holding retainage beyond reasonable time periods, further eroding cash flow and profits. Delays in pay for work already performed are increasing operating costs and causing firms to draw on already tightened lines of credit.
“From California to Boston, from Detroit to the Gulf Coast, we’re seeing the same theme,” says Jason Henley, chairman of the Construction Financial Management Association (CFMA) and CFO of Nashville-based general contractor D.F. Chase. “Payment has slowed across the board. It’s bad for general contractors, and it’s even worse for subcontractors.”
Darlene East, incoming president of the American Subcontractors Association and president of Holes Inc., a Houston-based concrete cutting and demolition firm, says some member firms are experiencing pay cycles averaging 90 days on roughly half of their projects. “There is a lot more foot dragging and excuses,” she says. “It’s a huge issue for contractors.”
An informal survey by ENR of ASA and CFMA member firms found, on average, firms reported 25% to 50% of work impacted by unusually long pay cycles. Roughly 90% of firms surveyed believe slow-pay problems are not a short-term phenomenon.
“Most owners we are dealing with are stretching payments as far as they can until the sub screams or threatens,” says Vincent Terraferma, president of KSW Mechanical Services Inc., Long Island City, N.Y. “It’s impacting our cash flow and our subcontractors who cannot get paid until we do.”
As a result, subcontractors must rely on lines of credit at a time when credit from banks is tighter and more costly. “All of that increases costs,” says East.
David Bradbury, president of Precision Concrete, Alpharetta, Ga., says 90% of his projects are experiencing unusually long payment cycles and increased haggling over retainage. Owners are “holding retainage until the bitter end,” he says. On one public project, the firm has $1 million pending in retainage on work completed in January.
Retainage is typically released 30 to 60 days after a sub’s final work is completed. Now, East says, “You see them withholding retainage on a dirt contractor, whose work has been completed for months if not years, based on small housekeeping details of the finish trades.”
Delays impact profitability, says Mel Burges, vice chairman of CFMA and CFO of Harcon Inc., Atlanta. “There’s the cost of money and the extra administration costs for getting paid,” he says.
Firms also say owners are tightening up considerably on change orders. Change orders “are becoming a lot more difficult to get through,” says East. “Owners are pushing back. It puts you in a difficult situation. Your contract says you can’t delay the job, but you can’t get your change order approved?”
Industry veterans say there is a fine line between being aggressive about payment and making the situation worse by biting the hand that feeds you.
Many firms are becoming more collaborative because they have little choice, says Scott Cahalan, an attorney with Smith Gambrell & Russell, Atlanta. “A year ago, subcontractors would have sued over some of the pay conditions we’re seeing,” he says. “Now we’re seeing a different attitude in order to continue to work with owners that have work.”
Burges says some firms routinely file a lien in anticipation that retainage will not be paid in a timely manner. But contractors are often reluctant to pull the trigger. “You can file a lien, but it really doesn’t give you a lot of leverage,” says Henley.
Still, Bradbury counsels subs to be more aggressive. “None of us have ‘national bank’ in our name,” he says. “We’re tired of financing projects, and that’s exactly what we’re doing.”