Why SoCal Contractors Get Paid Late — And How to Fix It

In Brief:

Slow payments are costing contractors billions. Delayed collections cost the construction industry nearly $300 billion annually and are the #1 factor limiting contractor growth.
Construction DSO runs 60–90 days, but it doesn’t have to. That’s among the highest of any industry. Even shaving 10 days off your average collection time puts meaningful cash back into the business.
Most delays are process problems, not payment problems. Missing documents and disorganized billing — not a lack of funds — are the leading cause of late payments. Getting it right the first time is the fastest fix.
Make it easy to pay you. E-invoicing, ACH, online portals, and automated reminders reduce friction and accelerate collections with minimal effort.
A collections problem becomes a growth problem. When contractors finance projects out of pocket, it limits hiring, equipment investment, and the ability to take on new work.

Delayed payments are a common challenge across the construction industry. A recent report estimates that slow and inconsistent payments cost contractors nearly $300 billion annually, and survey results found that 82% of general contractors experienced work delays or stoppages due to payment issues in the past year. While contractors cannot control market conditions, they can focus on the factors within the control of the business. One of those is how quickly payments are collected for completed work. To help clients, prospects, and others, JLK Rosenberger has summarized the key details below.

The Cost of Slow Payments

When payment is delayed, contractors still have financial obligations to meet, including payroll, materials, and equipment costs. Many contractors use business savings, retirement savings, credit cards, and lines of credit to cover these carrying costs. In effect, they are financing the project until customer payment is received.

Those delays can create challenges throughout the business. Contractors may have to delay equipment purchases or hiring for new projects. Additionally, payment delays have been shown to negatively affect overall project performance. These costs tend to come back to the contractor as additional labor hours at some point. Add on the administrative hours it takes to chase payments, and contractors are losing valuable resources.

In a larger sense, when contractors use borrowed funds, interest and inflation can reduce overall purchasing power. Even when contractors use personal funds they face tradeoffs because that money isn’t available for other investments.

All of these factors can limit business opportunities. A contractor may have the capacity and the pipeline to take on additional projects but not have the funds to support it. What starts as a payment issue can ultimately affect profitability and growth.

What’s Causing Payment Delays?

Part of the challenge is the nature of the construction business. Progress billing and retainage structures can contribute to longer collection cycles, particularly when payments are delayed. Then, requests for payment usually have to pass through multiple approvals before funds are released. As a result, contractors typically wait much longer to collect payment than businesses in other industries.

This is best reflected in Days Sales Outstanding (DSO), a metric that measures how long it takes to collect payment after work has been billed. Construction often reports DSO between 60 and 90 days, among the highest of any major industry. While longer collection periods are common in construction, that doesn’t mean every delay is unavoidable.

In fact, the report found that contractors and subcontractors most often cited a lack of organized processes as the leading cause of payment delays. Missing documentation, change orders, and other bottlenecks slow collections. In many cases, payments are delayed not because funds are unavailable, but it’s because something in the process is holding them up.

What Can Contractors Do About It?

Contractors can’t control some of the variables that come with the industry. They can, however, improve processes and collection methods. Even small changes can have outsized effects for the business.

One starting point is reviewing billing and documentation procedures. For example, a contractor may submit a pay app on time to a customer, only to find out that a required document is missing. The application then needs to be corrected and resubmitted, delaying approval and extending the payment timeline by weeks or even months. The goal here is to get it right the first time. Checklists and other standardized processes are helpful, as is providing targeted training for accounts receivable (AR) personnel or working with an outsourced team.

Monitoring key metrics like DSO can also provide valuable insight. Rather than focusing on industry averages, contractors may most benefit from measuring current DSO and setting a goal for improvement. For example, reducing average collection times from 75 days to 65 days can put cash back into the business sooner. Even small improvements can make a difference when cash is tight.

SoCal Contractors may also want to look at how easy it is for busy customers to make payments. Reducing friction is key to getting paid on time. Electronic invoicing, ACH payments, online payment portals, and automated reminders are proven ways to accelerate collections.