In the News

January 9, 2020

 

As the first full week of 2020 comes to an end, economists are eagerly piecing together economic indicators from the last year to build an outlook for the construction industry. Uncertainty of an economic slowdown fueled predictions at yearend in 2019 but dissipated when the anticipated signs of a downtrend failed to come to fruition. While some are carrying 2019 concerns into 2020, others are questioning how the industry will fare against the presidential election in November.

But first, the good news: Associated Builders and Contractors’ (ABC) chief economist, Anirban Basu, said in an ABC webinar, “America’s economic expansion, now in its 11th year, is not on the verge of ending anytime soon,” specifically for commercial construction. As of Jan. 9, ABC had not released information regarding the sector’s standings for December; however, November readings showed several positives, including lower construction input prices and an increase in nonresidential construction employment. In December 2019, ABC published its 2020 economic forecast, where Basu said he expects momentum but is adopting a “wait-and-see” approach.

“While construction spending is generally viewed as a lagging indicator of economic activity (among the last segments to be impacted by a downturn and among the last to begin to recover after one), the performance of the nation’s construction industry remains robust,” Basu said. “For the year, the industry added 110,000 jobs, an increase of 1.5%.”

That isn’t to say there aren’t concerns among contractors and other construction professionals, Basu said, such as increasing corporate and consumer debt and difficulties finding skilled workers. The chief economist said the inability to find affordable skilled laborers is the No. 1 complaint from general contractors. While residential construction activity picked up in December, NACM Economist Chris Kuehl, Ph.D, noted the “labor shortage remains a huge issue.”

“Industry lobbying groups and special interest groups continue to address these issues at the state and federal level in an effort to develop funding for trade education and apprenticeship programs, as well as ways to create a softening approach to immigration protocol, which should help to some extent,” added Todd A. Feuerman, director of the Audit, Accounting and Consulting Department at Ellin & Tucker, in his article, “The U.S. Construction Industry: Looking Ahead at 2020.” “However, headway needs to be made quickly and training is critical to develop a skilled work force to complete the backlog of construction projects both now and in the future.”

What remains to be seen is how much the 2020 presidential campaign and election will impact the construction sector going forward, but according to Basu, uncertainty will rise once again for U.S. businesses. A change in presidency could result in a change in taxes, defense contracting, and trade relations and regulations.

“All of the things this administration has done to roll back the regulatory burden to help with permitting and get projects out quicker would be under the microscope in a different administration and that would certainly be a concern for contractors,” Basu said.

 

 

Paper checks and cash contribute to slowdowns in accounts payable (AP). Requiring these payments to be manually tracked takes time away from other tasks and takes much longer to process than ACH or credit card payments. Sticking to these traditional methods slows down both the senders and receivers of these physical payments. With constant advancements in payment methods, moving away from physical forms of payment will continue to become easier.

According to a recent survey by Bottomline, manual processing was reported as the grandest challenge for small businesses and the “second-most pressing obstacle” for treasury departments. The problems persist outside of small businesses as 54% of companies with more than $1 billion in revenue said manual payment generation was one of their top-three business-to-business (B2B) concerns.

Amid these pain points in B2B transactions, there still remains a level of anxiety and apprehension surrounding new payment innovations. Several options exist for vendors and creditors—from ACH to a variety of FinTech payments—and commercial cards have made significant strides lately to ease the worries of B2B organizations that are uneasy about making the transition.

Interchange fees remain a sticking point for many businesses—especially smaller businesses that cannot afford to take on these fees—and commercial payment companies have begun to take note. In a recent statement by Revolution Payments, the company launched a new service to reduce interchange fees associated with accepting commercial cards. The service does not incur a direct cost on the end user but is instead designed to save on costs for B2B users. 

Commercial card companies have often been criticized for a lack of transparency in their surcharges and potential “hidden fees,” which has deterred vendors and creditors from embracing the benefits of using commercial cards. The U.S. Federal Trade Commission (FTC) filed a complaint recently regarding hidden charges by the company FLEETCOR Technologies, which may pave the way for higher standards and regulations regarding hidden fees from commercial card companies.

The FTC found FLEETCOR was charging unfair hidden fees, asking the Georgia federal judge to stop the company from charging these fees, according to a report from December 2019. Tens of thousands of FLEETCOR customers reported issues relating to hidden fees to the Better Business Bureau and other governmental agencies. The fees amounted to hundreds of millions of dollars in hidden fees, according to the FTC’s complaint. 

Due to a lack of regulation regarding commercial card fees, FLEETCOR has continued with these charges. But with this brought to the attention of the FTC and the Georgia federal judge, it may lead to more protections in the future for B2B creditors and vendors.

 

 

Construction creditors have to take into consideration they might not be paid right away—it’s a tough life for material suppliers when payments are delayed or never come at all. Knowing payments can come in slowly is one of the initial steps to becoming a great construction creditor. Knowing how to react and what to do when invoices aren’t paid within days of sending them is another story. Making credit decisions about who to work with and who not to do business with is also important, and if a creditor knows a subcontractor or general contractor is typically late with payment, hurting the creditor’s cash flow, do they even take the job? That’s one important question answered in the latest Construction Payments Report from construction finance firm Rabbet.

The 2019 report states there is a $64 billion payment gap in the construction industry due to slow payments, considering transactions for subcontractors and general contractors. The survey reported a $40 billion impact on the industry; however, it did not include general contractors. Nearly two-thirds of respondents were general contractors, and more than 40% said they had 2018 revenues of at least $20 million. Almost half of the subcontractor respondents said they had 2018 revenues of under $5 million.

Roughly two-thirds of subcontractors said they would not bid on a project if they knew the general contractor or owner had a reputation of slow payment within the previous year. In order to help combat late payments, almost three-fourths of subcontractors are willing to offer an early-pay discount if paid within 30 days. This would result in $44 billion in discounts. In total, 30% of respondents said work on projects was delayed or stopped within the last year due to a delay in payments.

The construction industry has a days sales outstanding of 51 days, Rabbet states, affecting cash flow, employee wages and customer and material payments. Roughly three-fourths of subcontractors are waiting 30 days or more to be paid. More than half of subcontractors are hit with financing charges during floating payments, including a line of credit and dipping into personal savings. Meanwhile, only 35% of general contractors incur financing charges during this time. However, three-fourths of general contractors reported paying certain vendors more than once a month.

The cost of general contractors floating payments only adds, on average, 2% to the cost of a project, yet represents the $24 billion added cost to the industry. With that said, 95% of general contractors reported they saw value in paying subcontractors sooner. If payments flow sooner, it can alleviate some of the issues downstream, such as mechanic’s liens. Slow payments caused 30% of subcontractors to file a lien during the last 12 months.

“Slow payments are an industry-wide problem that requires an industry-wide solution,” the report states. “It is imperative for industry participants to work together to eliminate the manual, complicated processes involved in invoice approval and payment distribution.”