Are Late Payments a Threat to a Contractor’s Survival?
A company whose customers take 90 days to pay typically need six times more cash to float the project/job costs than a company whose customers paid their bills in 30 days.
It’s no secret that the system of payments in the construction industry is seriously flawed, even bordering on the dysfunctional. As money flows down through the payment chain, the further you are from the top — think subcontractors, sub-subs and suppliers — the longer it takes for you to get paid. Late payments are so common in construction that timely payments are the exception rather than the rule, as evidenced by data provided by Dun & Bradstreet.
According to zlien’s research, the industry average to turn your invoices into cash is anywhere between 50 to 75 days, depending on the project type and your role. Keep in mind that this 50 to 75 day waiting period starts only after you’ve billed your customers. If it took, say, three weeks to get your invoicing done, then you have to add another 21 days to that 50 to 75 day window.
Perhaps because of the construction industry’s dismal payment data, too many businesses think of a late payment “win” as a customer finally paying up. They might say something like, “well, it might have taken three months longer than it should have, but at least I got my money.” While it is true that if you get paid is the most important thing, when you get paid can have a huge financial impact on your company, especially with regards to your cash flow.