When did getting paid in the construction business become so difficult?
Or maybe a better question to ask is: How did it get to be like this?
The entire industry used to operate on a solid foundation of strong personal relationships. Big deals were cemented with nothing more than a handshake. Payments were “guaranteed” by mutual trust.
Well, those days are over. The handshake of yesteryear has given way to overly complicated contracts. Meanwhile, trust has been replaced by retainage, complex paperwork, and regulatory red tape.
Even worse, when it’s time to get paid, all of the stakeholders on a project suddenly turn into adversaries. Everyone starts squaring off against one another in a zero-sum game to see who can best out-leverage their project partners.
So, how did it get to be like this? The truth is, as the industry and the work itself became more specialized, it was almost inevitable that payments would become more complicated as well. That does not mean, however, that it’s too late to fix the industry’s payment mess.
Fear and Loathing in the Payment Chain
Construction simply would not be where it is today without the advent of the specialty trade contractor. Specialization has been the driving force behind many of the industry’s biggest productivity gains. Nevertheless, as more subcontractors started to specialize in more of the work, the industry—and each individual project—became much more fragmented. Ironically, this same fragmentation is perhaps the main reason why getting paid has become so difficult.
This illustration (above) shows a hypothetical, modern-day project that should look familiar to anyone reading this article. Somehow, payments have to make their way through this mess. Starting at the top, the money has to literally pass through each stakeholder on its way down. At the same time, paperwork (primarily notices and waivers) needs to make it’s way up the payment chain.
On many projects, the payment chain stakeholders stress about what may go wrong: “Am I doing this paperwork correctly?,” “What happens if a lien gets filed?,” and “When will I receive my payment?”
Clearly, the protection-first status quo is not working. Not only does it take longer to get paid in construction than in most other industries, but recent data from a number of different sources suggests that this trend is only getting worse.
Instead of working together, the primary goal for the stakeholders is self-protection—each party on the job does everything they can to protect themselves, often at the expense of other stakeholders. This is the zero-sum game we mentioned earlier.
Like many of life’s most vexing problems, a little collaboration would go a long way to helping fix the construction’s entrenched payment nightmare. Why, then, is the industry so reluctant to adopt a collaboration-first mindset? In our opinion, the answer is because of the 3 Fs—Fears, Frictions, and Fires.
Fears, Frictions, and Fires Are Collaboration Killers
In his recently published payment manifesto, “lienzero,” Levelset CEO Scott Wolfe describes the 3 Fs this way:
- Fear – leads everyone to load themselves up with leverage and protections, such as overly complicated contracts.
- Frictions – are caused by the red tape and the required paperwork (notices, waivers, etc). The friction comes from exchanging these documents, a process that damages relationships, erodes trust and puts project participants in a bad state of mind.
- Fires – otherwise small problems escalate into full-blown fires that can be impossible to put out. It all comes down to the fact all of the participants are entrenched in adversarial positions, trying to protect themselves by out-leveraging everyone else.
So, how do the 3 Fs impact payments? Let’s unpack them.
Typically, each project stakeholder only knows the parties with whom they directly interact. For example, the owner knows the identity of the general, but they probably don’t know some or all of the parties below that (the subs, suppliers, and so on). Of course, that works both ways. Subs and suppliers may know the identity of the project owner, but they likely do not have an established line of communication with them.
But here’s the thing—any one of these stakeholders can be the source of a problem on the project. Even if, or perhaps especially if, you didn’t contract with them. That’s because in most cases, every stakeholder that provides labor and/or materials will have a mechanics lien right.
People fear what they don’t know and what they can’t see. On the average construction project, there’s a lot of both.
Because of the fear caused by the payment risks that exist on a typical project, the industry developed several procedures, documents, and other tools to help participants manage these risks. However, somewhere along the way, the intended benefit of these documents became overwhelmed by the sheer difficulty of getting them right.
Instead of being helpful, these tools came to be regarded as red tape. And, instead of making the payment process smoother, they only seemed to add to the confusion.
Two of the most important payment process documents—preliminary notices and lien waivers—were originally created to benefit the project participants at the top. However, people don’t know which type of lien waiver to use, when to send it, whether to sign it or get it notarized.
Likewise, all 50 states have complicated rules and requirements associated with sending preliminary notices. Perhaps even more concerning, though, is the fact that project participants are scared to send preliminary notices at all for fear that these documents will be perceived as adversarial.
Whenever you’re talking about a full-blown payment fire, the damage is not going to be limited to just one or two parties. It’s going to have a ripple effect.
Given everything we’ve said above about fears and friction, it’s really no wonder that payment fires erupt. Given the complexity of today’s construction industry, it’s a given that issues and problems are going to occur. The real problem is when these small payment issues turn into avoidable big payment problems, and those, in turn, become full-blown payment fires with a potential to disrupt the project.
Whenever you’re talking about a full-blown payment fire, the damage is not going to be limited to just one or two parties. It is going to have a ripple effect, and it will affect other parties on the same job, even if they are not directly connected to the fire. It may actually affect other jobs.
It’s Time for a Change
The answer to fix all of this isn’t earth-shattering. In fact, the answer is really quite simple: collaboration. If we’re going to fix the industry’s broken system of payments, we have to do nothing less than change the very way in which we work together. We have to change the status quo from protection-first to collaboration-first.
That change begins with a new framework—the SET Framework, which is an acronym that stands for:
- See everyone on the job to reduce fear.
- Easy paperwork to reduce friction.
- Talk it out to put out fires.
Adopting these three principles can help shift the industry status quo away from protection-first and toward collaboration-first. If applied correctly, it will dramatically improve the outcomes for all of the stakeholders on your next job.
Download a free copy of lienzero by Levelset CEO Scott Wolfe to read more about the 3 Fs, the SET Framework, and how the industry can come together to fix construction payments.
Levelset and Procore’s integration allows you to minimize your lien risk with an easy and effective waiver process while enhancing the experience of your project stakeholders. The integration links projects between Levelset and Procore. Any notices or completed waivers you receive in Levelset will be instantly sent to the project’s document library in Procore. To learn more click here.