Facility owners’ credit crunch and cash flow issues are trickling down in the form of slow payments to general contractors, specialty contractors and suppliers, as well as extended holds on retainage. This puts an undue burden on the firms that often need the cash most.
But not all delays on the part of the facility owner are the result of cash flow issues.
For many facility owners, the internal approval process is complicated. In most cases, an invoice or application for payment goes to a central payables department or to the owner’s project staff, and is routed for approval. Construction requests for payment typically entail large sums of money, which add complexity and steps to the process. Any missing or incorrect supporting documentation can slow the approval process considerably.
Once the project team approves a payment, it still has to go through the owner’s finance or procurement team before funds are authorized for disbursement. The result could be a 60-day or longer payment approval process. Determining the status of an approval that is in process can be equally challenging, making it difficult to predict when payments will be received.
Breaking the Slow Pay Cycle
More owners are turning to project management software to facilitate the routing and approval process.
One large regional health care organization with a $500 million capital program realized significant gains by setting up a structured approval process within a software system so payment requests are automatically routed to the correct people for review and approval. Once the payment request is approved, the financial information is automatically transferred into the accounting system, where funds are authorized and disbursed.
If contractors, suppliers and vendors electronically enter their payment request information with all of the supporting documentation, an approval can be obtained in two to three hours, or a check request or disbursement can be authorized immediately.
The No. 1 benefit is a shorter pay cycle for contractors that conduct business with the owner. And, as the owner develops a reputation for being an on-time payer, it benefits from more interested bidders and more competitive bids.
If a contractor works with an owner that uses a project management system, it should inquire about any payment approval capabilities. Often the system has the capability, but it’s not being used.
If the owner doesn’t have a project management system in place, but asks for help selecting software, the contractor should lobby for payment approval capabilities.
Finally, contractors required to use an electronic system should embrace the opportunity to stand out as a company that is willing to try something new and improve the process for everyone involved.
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Friday, September 3, 2010