When it comes to digital transformation in construction, the topic of "payment systems" isn't necessarily the most exciting subject for many of us, especially when compared to the enthusiasm for topics like AI, 3D printing, and AR/VR.
But payment systems—particularly those that connect GCs and subs—are extremely important and, quite frankly, due for a digital overhaul.
Here to talk about how to do just that is Mike Milligan, the Chief Growth Officer from GCPay*, a cloud-based solution that helps general contractors manage pay applications, lien waivers, and electronic payments.
This episode of Digital Builder tackles the typical payment process between GCs and subcontractors and why firms must start digitizing their workflows.
*GCPay was acquired by Autodesk after this episode was recorded at Autodesk University in 2023.
You can also listen to this episode on Apple Podcasts, Spotify, YouTube, and anywhere else you get your podcasts.
We discuss:
Construction payment processes are lagging behind other industries. While sectors like retail and professional services have largely adopted digital payments, most general contractors continue to use manual methods to pay subcontractors.
"They are still writing physical checks. That's a lot of paper. But more importantly, it's a lot of manual workflows that represent not just a lot of time but a lot of potential human error," says Mike.
"If you're managing 10, 15, 20, 30, or 50 jobs a month, chances are you've got hundreds if not thousands of subcontractors working for you over a period of years. And they've got to be paid at certain increments in time based on billing timelines and schedules. So that's a lot of paperwork."
The role of lien waivers in the payment process for US-based contractors
These manual procedures are especially prevalent in the United States because we rely heavily on lien waivers.
"The US specifically has certain requirements associated with paying subcontractors in a timely manner. There are these documents called lien waivers," explains Mike.
"Other countries don't have those types of lien waiver documents simply because government legislations do that work for the general contractor. But here in the United States, lien waivers are very much part and parcel to subcontractors getting paid on time for work that they're doing."
He cites research showing that completing, documenting, and signing lien waivers can take eight to ten emails between GCs and subs, illustrating just how inefficient the process is. These bottlenecks lead to payment delays, hurting subcontractors and, ultimately, GCs.
Fortunately, things are starting to look up, with countries like the UK and Canada pushing for prompt payment legislation.
Mike breaks it down: "If you're a GC and you've got subcontractors working for you, and you don't pay them on time as per their contract, you're in deep trouble and you're going to get fined."
He adds, "It's already in a couple of provinces in Canada, but we're starting to see this trickle into the United States. Illinois is looking at it, California is looking at it. And so if you're not paying your supply chain on time and managing all of the documentation, you won't just get fined. You're going to get left behind because those subs will go to work for another GC."
So, why are some firms hesitant to roll out digital payment systems? Mike says it's a matter of outdated mindsets and procedures.
Seen as an expense vs. investment
The first factor is that many firms perceive backend solutions like digital payments as an expense versus an investment.
"When companies are looking at adopting technology, they, of course, want to get the cool stuff. They want to get the field-based project management or the BIM technology," he remarks.
"When it comes to finance and accounting and payment technology, it's like, 'Yeah, we don't need that because we've got human capital to deal with those types of workflows.' So, it's seen as an expense instead of an investment."
Outdated mentalities
The second factor comes down to traditional practices and resistance to change.
"There's this crazy outdated mentality between the GC and the sub where the GC says, 'I'm going to write a check, leave it at my front receptionist desk, and call the subcontractor to tell them they can come pick up their check. But they've got to bring their signed lien waiver to get that check in their physical hands.'"
In other words, many GCs prefer the tangible assurance of a manual process.
As Mike puts it, "The GC doesn't want to pay the sub until the sub has met all of their requirements regarding documentation and lien waiver forms. That's why you have this face-to-face interchange and card trading trick that happens often in the front office."
Of course, if we want to continue progressing as an industry, we need to let go of these outdated mindsets.
If your firm is experiencing labor shortage challenges, slow and cumbersome payment processes will only aggravate your issues.
Mike remarks, "Labor shortage is one of the biggest challenges facing the construction industry today. GCs are finding extremely challenging situations finding labor, whether it's job site labor, subcontractor labor, or reliable labor along every step in the construction supply chain."
He adds, "If your payment methodology and payment processes are not fair and equitable, that just adds to the labor shortage and the labor challenges that everybody is facing."
We discussed why you should consider digitizing your payment systems, but how exactly can you do it? According to Mike, the first step is to talk to your peers. Find contacts in companies that have adopted digital payment solutions and ask them about the systems they're using and their experience.
"The industry is very small. It's also viral. After 13 years of working in construction, I have found that it is a very tribal industry. Word of mouth goes not just a long way, but almost all the way."
Already talked to your peers? The next step is to do your research.
"Go to Capterra, go to G2, look at software reviews by real users. Look at who the vendors are out there who specialize in automated subcontractor management and payment management."
Taking these steps will help you identify potential software vendors and gain a clearer understanding of what might work best for your company.
"Once you narrow down software providers you want to learn more about, check out their websites. Most of their websites have customer testimonials, case studies, and mechanisms to self-direct your journey to learning more about technologies to help you manage payments more efficiently."
Digital Builder is hosted by me, Eric Thomas. Remember, new episodes of Digital Builder go live every week. Listen to the Digital Builder Podcast on:
