One of the biggest headaches for many builders, particularly on larger projects, is keeping track of what is due to whom and when. Australia’s recent laws protecting payments to subcontractors, have added another layer of complexity.
The 2017 Murray Review found that getting paid on time and in full according to contracted payment dates was a recurring issue for many subcontractors and vendors. These issues can lead to serious consequences, including the inability to pay staff and suppliers, or even insolvency. Within the Murray report’s set of recommendations, was a proposal that retention payments for subcontractors and vendors on major projects be held in a designated Trust Account.
What are Retention Payments?
Retention payments are a percentage of milestone payments owed to a subcontractor or vendor. They are withheld pending full practical completion and resolution of any defects. Many project owners or end clients also hold retention payments from monies due to the head contractor at the agreed project milestones. These are first released at the completion of the project. The remaining percentage of funds are released at the end of the Defects Liability Period or another contractually nominated date.
The payments help reduce risks for both project owners, and for head contractors. They provide a form of cash guarantee that others in the supply chain will meet their obligations, including delivering work to the required quality standard.
According to many in the industry, however, the payments also make life extremely complicated for the accounts teams and project managers. Many builders or subcontractors using manual systems, such as paper and pen or Excel spreadsheets, to calculate retention payments report the process is extremely time-consuming. Monthly, it can add up to 20 hours of number crunching and paper chasing.
Retention Payments Can Slow Down Projects
Major projects can average hundreds of separate invoices a month. These often need to be sorted manually in order to see which invoices require a retention payment to be withheld and which don’t. For example, the supplier of the site Portaloo probably does not need to have a retention payment withheld, but the subcontractor who laid the slab it sits on might.
“Cashflow is more important than your mother.”
Among the biggest issues in managing the complexities involved in retention payments is that blockages in the cashflow and project payments system can escalate into problems that can slow down or even potentially halt a building project.
“Cashflow is more important than your mother,” says Hass McCook, Systems Implementation Manager at Dasco.
Head contractors can also experience cashflow issues from above when clients request proof of subcontractor milestone payments before releasing funds.
Simplifying the Process
Research by Procore Technologies, Inc., a leading provider of construction management software, found a simpler process that can help companies save time, improve accountability, and enable everyone to easily meet requirements across different jurisdictions. A new enhancement to Procore’s Invoice Management product, specifically for Australia and New Zealand, was developed to deliver this functionality.
Specifically, the new retention feature allows project administrators and the finance team to assign up to five rules that get applied to each supplier or subcontractor invoice or variation. These rules automatically assign the appropriate retention payment, thus creating trackable records and financial flows and drastically reducing the manual effort involved.
Approve Invoices Faster
It also brings some smarts to the cashflow equation, by providing a more seamless and efficient flow of payments owed to subcontractors and suppliers. The result is an ability to collect, review and approve invoices faster, all while meeting legal and other obligations.
The enhancement also helps to assist contractors with navigating through Security of Payment or retention payments regulations; the rules can be easily varied for different states, contracts or projects.
It also means users are future-proofed should other states follow the QLD and NSW lead and introduce legislation based on the Murray Review recommendations.
Moving from Paper to Digital
There’s another trend the enhancement mirrors—the growing digitisation of every aspect of the construction lifecycle. Project design, specification, scheduling, and overall management are increasingly moving from paper to megabyte.
The ultimate goal of all the new technologies is to improve productivity.
In this cloud-hosted construction era, industry leaders are looking to digital solutions to handle the financial aspects of their projects. Their introduction can be especially beneficial when they integrate with other elements, such as quality, safety, and compliance.
The ultimate goal of all the new technologies is to improve productivity. Billing and payments are a crucial element of this because billing delays create building delays.
There’s one, even more important factor to consider.
As submissions to the Murray Review noted, reliable payment has a major influence on a company’s reputation. And, let’s face it, reputation matters when it comes to winning big projects as well as attracting and retaining the best subcontractors to help build them.
For more information about how Procore’s Invoice Management product can help your company save time, improve accountability, and help everyone to easily meet requirements across different jurisdictions be sure to request a Procore demo.