We read with great interest an article published in May 2017, in ENR (Engineering News-Record) by Thomas C. Schleifer, PhD., a construction industry expert. Dr. Schleifer has 45 years of experience doing every conceivable job in the field and in the office, from laborer to foreman to executive. He has also owned his own construction company and has spent a significant portion of his career as a consultant specializing in turnarounds of distressed and failing construction firms.
Dr. Schleifer’s provocative article began with the attention-grabbing headline: “Is Late Payment Your Own Fault?”
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Centered on the broken system of payments in the construction industry (a topic that levelset is very passionate about), Dr. Schleifer’s article focuses primarily on the relationship between project owners (the payers) and general contractors (the payees). Dr. Schleifer does not mince words when he describes late payments as an “industry nightmare that violates contracts [and] multiplies risk.”
Dr. Schleifer continues his examination of the effect that late payments have on upper-tier parties, presenting a compelling argument: “the root of the problem begins with construction billing procedures” in which payees cede too much control to the payers by agreeing to contracts with “one-sided terms providing designers and owners unreasonable control over the payment process.” Even worse in Dr. Schleifer’s view is that “[general] contractors allow it to happen” due to their belief that “they have no influence over the payment process.”
As a result of their passivity, prime contractors are surrendering a “financial advantage and inappropriate leverage” to those above them in the payment chain, the owners and designers. According to Dr. Shleifer, the entrenched, broken system of payments in the construction industry starts at the very top.
But just because the late payment problem starts at the top doesn’t mean that the payment inequity in construction is confined to just the top-tier participants. levelset is well aware that the payment problem flows down the payment chain, affecting every project stakeholder along the way. The financial risk faced by GCs who are directly hired by the parties funding a project is amplified for subcontractors and suppliers who are more removed from the top of the payment chain.
It works something like this: GCs are paid late by the owners, and they, in turn, pay their subs late, managing their payment risk by shifting that risk down the chain to the project stakeholders below them. Meanwhile, the lower-tiered parties in the payment chain must pay their employees on time, and often don’t have the ability to delay their payments to their vendors. The end result is that, when the top-tier shifts their payment risk exposure down the chain, the companies below them get squeezed. Making this bad situation worse is the fact that many of these lower-tiered companies are the least-equipped financially to bridge this cash squeeze, especially when compared to the other companies involved on the project.
As we passed Dr. Schleifer’s article around our offices here at levelset, we were reminded of the challenges that our customers face every day. Even though the payment problem in the industry starts at the top, its effects flow down through the payment chain and often adversely impact every single stakeholder on a construction project. The change in the industry advocated by Dr. Schleifer is very similar to our beliefs at levelset, where we have long said that the construction industry must be led “kicking and screaming” to payment reform.