They say, "You don’t know what you don’t know". And they would be right!
Recently, I wrote an article about the problem of slow payments in the construction industry, Construction Payments: Turning a Negative into a Positive, which received a lot of good feedback, and thankfully, many messages from people who wanted to know more. What I didn't know at the time, was that our Trimble PPM team had also been dialoguing on this issue with several of our e-Builder client-partners. There were emails, posts and conference calls, and the culmination was a webinar based on the same Construction Dive article that had inspired me to contribute to the conversation. If you are interested, spend a few minutes with capital project executives Gary Younger from Northeastern University and Tony DiTolve from the University of Virginia. These guys validate the problem and discuss how they used technology to solve it at their respective universities. Check it out here: On-demand webinar: SPEED MATTERS: Reduce Payments from Months to Days.
Back to what you don’t know, or humbly, what I didn’t realize. I knew this was a big problem. It makes sense. We use terms like “Project Team” and “Collaborative Partnership” when we discuss the individuals and individual companies who work to make a project happen. If the individual contractors, consultants, vendors, etc. are being harmed that means the team is being harmed and ultimately the project is harmed. What I did not know is that his problem has been quantified to the tune of $64 billion dollars. That’s billion with a capital B! Additionally, the average time it takes an owner to pay a contractor is 51 days. And that is, generally speaking, 21 days late by agreement. So owners are spending $64 billion on fines and interest. $64 billion that did not buy a single material line item nor pay for a single hour of labor. $64 billion dollars worth of nothing.
What I knew was that contractors and their subs can be selective about what they bid during good market cycles. What I never thought of was that for public owners like UVA the requirement to select a diverse team (MBE, WBE, etc.) gets even trickier if the owner has a reputation for slow-pay. This problem is also intensified for a large owner in a smaller city with fewer contractors present. What I never thought of was that owners don’t just want the best contractor, they want the best project team and site superintendent inside that contractor’s organization. And these individuals also have some say in which owner they work for.
What I did not know, or what I failed to recognize, is that owners are really the ones who suffer the ultimate burden of slow pay. I reported in the previous article…
“Generally speaking the subcontractor and its suppliers bear the bulk of the burden of slow-pay, as the parties furthest from the source of money, the owner. They are the first to extend their own capital, the first to put their cash-flow at risk.”
While this statement is true it neglects an equally important fact. Let’s put it this way; Subcontractors and vendors finance this $64 billion dollar problem, but owners are the ones who ultimately pay the price.
The obvious conclusion is this: Construction owners must recognize this problem. They must manage the challenge of correcting it. Or else they will continue to use precious capital dollars to buy nothing.