Eliminating the Pain Points With Progress Payments

Payment delays have long plagued the construction industry, collectively costing construction companies an astronomical $273 billion in 2023 alone, according to a report from Rabbet.

As that report documents, issues caused by slow payments are reverberating up and down the construction payment stream. In 2023, 72% of contractors reported payment delays longer than 30 days, up from 49% in 2022.

Overall, the damage these delays inflict—to profit margins, project timelines, company financial standing, brand reputations, business relationships and public confidence—is immeasurable. For a business in which cash flow is paramount, the solution is as complicated as it is obvious: get paid faster by customers so you can make faster, more reliable payments to your subcontractors. Doing so, according to Rabbet, would eliminate 14% of total construction costs. Imagine how that could impact profit margins.

Progress Payments

As persistent and costly as the construction industry’s payment problem is, it explains why the practice of progress payments holds such appeal. When they are executed as intended, they can benefit stakeholders up and down the construction payment stream. They give owners and prime contractors an opportunity to review and measure subcontractors’ in-progress work, for example. They also can uncover potential quality of work issues earlier in a project, before they escalate. Progress payments can be a valuable cash-flow-management tool for contractors and subcontractors, enabling them to recoup some of their costs during a project instead of at its conclusion so they can maintain a more consistent and predictable cash flow and pay employees and suppliers on time, without taking on additional debt to cover their costs.

Progress payments also encourage consistent, honest communication among project stakeholders, which can strengthen business relationships and lead to additional project work. What’s more, contractors who demonstrate they can manage progress payment processes seamlessly give themselves a competitive advantage because they’ll likely be perceived in the marketplace as capable, accountable, and well-managed.

Streamlining the Process

Therein lies the challenge. Not all construction firms are equipped to effectively manage progress payments, from gathering documentation to submitting and tracking applications to processing payments. Without the capabilities to streamline these potentially complex and cumbersome processes, pursuing progress payments can become a headache rather than a worthwhile undertaking.

Here’s a look at three common pain points that accompany progress payments, with prescriptions for how contractors can address them so cash can flow more freely to them, and across the construction payments stream. 

Pain point 1: The painstaking process of collecting documentation to support a progress payment application can overwhelm an underequipped contractor and subcontractor.

Collecting all the information required to support a progress payment application can become unwieldy and overly time-consuming when it relies on manual processes to hunt down and reconcile data (internally and from potentially dozens of subcontractors) across a multitude of siloed systems—and in some cases, from companies whose financial and accounting systems amount to little more than spreadsheets, or worse yet, a series of sticky notes pasted on a desk somewhere. Timecards, receipts, cost and completed work reports, jobsite photos, change orders, lien waivers—collecting all this documentation can become so daunting that it ultimately undermines the rationale behind pursuing progress payments in the first place.

The Rx: A jobsite management platform to serve as an information submission and collection hub, with capabilities that make submitting and collecting work done on site easy for contractors and their subs, and that verify, synthesize, standardize, and link that data to progress payment applications for specific projects.

The idea here is to connect contractors and subcontractors via a single, fully mobile-enabled system through which subs can record, annotate, and upload real-time information documenting their progress on a project, including data, images, videos, and more, which contractors can then verify, have it recorded, and quantified in the platform. 

While the prospect of getting paid faster and more consistently certainly gives subcontractors incentive to use such a system, it has to be simple for them to onboard and use. It also has to make it easy for contractors to verify and document the information their subs provide.

Ultimately, as firms like Mexican real estate developer IDEI are discovering, such a platform forges an important connection between field teams and the back office to support progress payments. “With the integration between a jobsite application and our ERP, we can achieve certainty of the physical progress of the worksite, which is communicated to the back-office for a more agile payment execution,” said Francisco Garza, the company’s CIO.

Pain point 2: Disputes among contractors, subs, and/or owners arise from discrepancies, ambiguities, or errors in progress payment applications and supporting documentation. 

As relationship-driven as the construction business is, providing questionable documentation for a progress payment application can create differences of opinion (about the level of work completed, for example) that lead to friction and even soured business relationships between project stakeholders, which doesn’t bode well for earning repeat business. What’s more, time is money, and the negotiations required to resolve these kinds of disputes take time, potentially delaying a project and hampering cash flow. 

The Rx: The means to provide airtight documentation.

To avoid uncomfortable situations like these, you want unimpeachable documentation and data. The goal is to minimize grounds for dispute and get everyone on the same page. That becomes a much more straightforward proposition with a single data reservoir that holds all documentation for specific projects and payment requests, with information that’s verified, readily retrievable, and easy to link to a specific project and payment application.  

Pain point 3: Creating, submitting, and tracking progress payments requires a lot of time-consuming, repetitive work.

Developing payment applications multiple times across multiple projects can devour huge chunks of time, particularly if the teams responsible for doing so have to reinvent the wheel every time they send out a new application. Not only do they have to spend time gathering information, they also have to ensure applications meet contractual requirements for factors like retainage while conforming to specific progress payment forms and formats.

The Rx: Tools that standardize and streamline the processes that support progress payments.

Standardization and automation are key to taking the headaches out of creating, submitting, and tracking progress payments. With the right tools, a company can develop standards, processes, practices, and forms for creating payment applications (conforming to requirements in the AIA G702 form and ConsensusDocs 710, for example), and for tracking applications. 

And finally, they can also make it easier for parties to actually submit payments, the last and perhaps most important step in a practice that, if executed efficiently, can go a long way toward solving one of the construction industry’s oldest and costliest problems.  

Shenaz Bilkis is the head of construction, travel & transportation GROW industries at SAP, with a keen focus on the construction industry, a personal passion of hers. She’s based in Singapore.