Why Construction Vendors Are Underperforming: Low Rates and Slow Payments

So you run a construction subcontracting business and things just aren’t going well. Projects are scarce, rates are in the gutter, and getting paid for the work you do land is like pulling teeth. What gives? Turns out, the broader construction industry in the U.S. is facing major headwinds that are squeezing vendors and subcontractors. Between a skilled labor shortage, rising costs of materials, and a slow shift to new technologies, general contractors and builders are under pressure to cut costs wherever they can - and that often means nickel and diming their vendors and subs with low rates and slow payments. If any of this sounds familiar, keep reading. We’ll unpack the key trends impacting the construction industry and vendor underperformance. More importantly, we’ll share some strategies your company can use to push back on unreasonable terms, improve your cash flow, and make sure you get paid what you’re owed. The construction industry may be in a slump, but that doesn’t mean your business has to suffer. Fight back with the tips and insights below.

Low Rates for Contractors Are Impacting Work Quality

Lowball rates are killing construction vendors. When contractors have to cut corners to turn a profit, the quality of work suffers.

• With tight margins, contractors can't afford to do the job right. They end up using cheaper materials, taking shortcuts, and rushing work to finish on time. The end result is shoddy craftsmanship that doesn't stand the test of time.

• Skimping on pay also means losing good workers. Talented tradesmen will go where the money is, leaving less experienced crews who make more mistakes. Work gets botched, deadlines get missed, and rework ends up costing more in the long run.

• Slow payments compound the problem. When contractors aren't paid for months, they struggle to pay their own bills and subcontractors. Cash flow problems lead to bankruptcy for some, while others sacrifice work quality to avoid that fate.

It's a vicious cycle, but the root cause is unrealistic rates that make high-quality work near impossible. If we want construction that lasts, owners need to pay fair prices, and pay them on time. Contractors should also stand up for themselves more in negotiations to secure rates that allow them to do the job well and build a sustainable business.

While cost-cutting is tempting, quality pays off over the lifespan of a building. Paying good wages and billing promptly benefits everyone in the long run. When contractors can afford to care about their craft and keep skilled workers, the result is construction that withstands the test of time. That's better for owners, vendors, and society as a whole.

The Vicious Cycle of Slow Payments in Construction

If you’re a construction vendor, you know the pain of slow payments all too well. It’s a vicious cycle that’s hard to break.

• You take on jobs at low rates to win the work, hoping to make up for it in volume. But then you’re stuck waiting months to get paid, slowly draining your resources and profit margins.

• By the time payments do come in, you’ve likely had to take on more low-rate work just to keep cash flowing. And the cycle continues.

How did we get into this mess? A few factors are at play:

1. Tight competition. So many vendors are vying for the same jobs that companies can get away with paying bottom dollar. You feel like you have to accept whatever’s offered just to secure work.

2. Poor contract terms. The contracts you sign often don’t provide clear payment terms or consequences for late payments. You have little recourse to demand timely payment.

3. Layers of bureaucracy. Invoices and payments have to go through so many hands at large companies that it drags the process out for ages. And if there are questions or disputes, it takes even longer to resolve them.

4. “It’s always been this way.” Slow payments have been the norm in construction for so long that companies don’t feel pressure to improve. But that doesn’t make it right.

The only way to break this vicious cycle is for vendors to band together and demand better. Renegotiate contracts, charge interest on late payments, and don’t be afraid to walk away from bad deals. If we stand up as an industry, construction companies will have to make changes to keep good vendors on board. And that will make the system work better for everyone in the long run.

How Slow Payments Negatively Impact Contractors

Slow payments are the bane of any contractor’s existence. Not only do they hamper cash flow, but they also cost time and money to chase down. Here’s how late or missing payments negatively impact contractors and vendors in the construction industry:

Higher Administrative Costs

When payments drag on for weeks or months, contractors have to spend more time and money following up with clients and managing invoices. This diverts resources away from actual construction work and cuts into already tight profit margins.

Cash Flow Problems

Without payments coming in on schedule, contractors struggle to pay their own bills like materials, equipment costs, payroll, and subcontractors. This can damage relationships, hurt their credit, and in severe cases even threaten the survival of their business.

Lost Opportunity Costs

Time spent hounding clients for payments is time that could have been spent finding new clients and projects. Missed payments essentially rob contractors of the chance to grow their business, advance their skills, and increase their earnings.

Higher Rates for All

When some clients fail to pay on time, contractors have to increase their rates for all clients to account for the added risk and costs. This passing on of costs is an inefficient solution that harms both contractors and their clients in the long run.

The hard truth is clients who don’t pay on schedule are taking advantage of contractors and threatening the viability of businesses they depend on. By improving billing cycles, revising contracts to include stricter payment terms, and being willing to walk away from chronically late-paying clients, contractors can strengthen their cash flow, lower their costs, and build a more sustainable business. Overall, a small change in how the industry handles payments can have a huge positive impact.

Why GC's Have Trouble Paying Subcontractors on Time

Slow Payments from GCs Impact Vendors

As a subcontractor, getting paid in a timely manner is essential to keeping your business running. Unfortunately, general contractors (GCs) are often slow to pay their subs, leaving vendors struggling with low cash flow and high costs. This damaging cycle makes it difficult for subs to then pay their own bills and employees.

Several factors contribute to GCs delayed payments:

1. Poor billing practices. GCs frequently receive invoices from subs that are incomplete, incorrect, or confusing. This slows down the approval and payment process. Make sure you submit clear, detailed invoices on time to avoid delays.

2. Project financing issues. If a GC is having trouble securing funding for a project, they may delay payments to subs until more money comes in. There’s little you can do here except stay in close contact with the GC to get updates on the project status.

3. Disorganized accounting departments. Some GCs simply have inefficient accounts payable departments that struggle to process payments in a timely way. Unfortunately, subs often suffer the consequences of disorganization that is out of their control.

4. Intentional delayed payment. In some cases, GCs may deliberately delay payments to subs as long as possible in order to improve their own cash flow, even though it’s unethical and damaging. The only options here are to put payment terms in your contract, send proper notices, and be willing to take legal action if needed.

While slow payments are an ongoing problem, there are a few steps you can take to improve the situation. Maintain open communication with GCs, submit accurate invoices on schedule, put strict payment terms in your contracts, and don’t be afraid to send proper notices if payments are late. Taking a proactive approach will help ensure you get paid for the work you do.

Solutions to Improve Contractor Performance and Cash Flow

Improved Communication

To get construction vendors back on track, improved communication is key. Project managers should connect regularly with vendors through calls or in-person meetings to provide updates, address any issues, and ensure everyone is on the same page regarding schedules and expectations.

• Provide clear instructions and documentation on the scope of work. This will minimize confusion and prevent vendors from underperforming or going over budget.

• Be transparent about payment terms upfront. Explain the billing cycle in detail and stick to the schedule. Surprise delays or changes will only further strain the relationship and cause more problems.

• Make an effort to build rapport and trust. Take time to understand the challenges vendors face and find ways to support them. Strong working relationships lead to better outcomes for all parties involved.

Revised Contract Terms

It may be necessary to revisit contract terms to establish a fair and reasonable agreement for both the construction firm and vendors. Some options to consider include:

1. Negotiate prices that account for increasing costs of materials and labor. Vendors cannot sustainably operate on rates that are too low.

2. Include clauses for cost escalations and change orders to ensure vendors are compensated if expenses exceed the initial budget due to unforeseen circumstances.

3. Reduce payment cycles to 30 days or less. The industry standard is too long, making it difficult for vendors to meet their own financial obligations. Shorter terms will ease cash flow issues and prevent delayed projects.

4. Build in performance incentives and penalties to motivate vendors. For example, offer bonuses for meeting key milestones ahead of schedule or withhold a percentage of payment if work is not completed on time.

### Ongoing Management

Construction firms need to actively manage vendors and projects to achieve optimal outcomes. Key strategies include:

• Conduct regular site visits and inspections to check on progress and quality. Identify any problems early on to minimize delays or having work redone.

• Monitor key performance indicators like timelines, budget, safety, and quality standards. Take corrective action quickly if vendors start to underperform in any area.

• Provide mentorship and training for vendors to help them improve. A stronger, better equipped supply chain will benefit the firm in the long run.

With better communication, fair contracts, performance management, and a willingness to invest in vendors, construction firms can get their supply chain back to peak performance. It may require short term sacrifices, but will pay off through increased productivity, cost savings, and stronger partnerships.

Conclusion

You see, the construction industry relies heavily on vendors to keep projects moving, but when those vendors aren’t paid properly or on time, the whole system starts to crumble. Low rates and slow payments are choking the life out of many construction vendors and subcontractors, making it hard for them to deliver quality work and stay in business. But there are solutions here if general contractors and developers make the effort. Pay fair rates, streamline your billing cycles, and commit to on-time payments. When you support your vendors, they can support you. The entire construction industry benefits from a robust network of vendors, so make sure you’re doing your part to keep them around for the long haul. Together, we can build a system where vendors thrive and projects shine.