In the past year, several high-profile payment disputes in the construction industry have made headlines for all the wrong reasons, and a new Bill threatens to make things worse, says Payapps Chief Operating Officer Tony Simonsen
In 2020, 58% of unreasonable contract disputes cost up to $99,000, 18% cost between $200,000-$999,999, and 6% cost more than $2 million, the 2021 BDO Construction Sector Report found.
Construction companies are struggling to track payments and progress claims. The complexity around tiered retention calculations and manual processes is slowing down not just operations but increasing risks including financial penalties.
So, what is the solution? It will take robust improvements throughout the supply chain to counter these challenges, but an obvious option is digital transformation given the known lag across our sector.
Put simply, easily integrated digital tools specifically designed for contractors, subcontractors and builders can disrupt our still largely traditional industry with innovative, automatic solutions to what have to date been considered huge pain points.
Prominent Cases Making Headlines
When Decmil Construction NZ Ltd went into liquidation, it had an adverse impact on a number of families and the education of many of New Zealand’s young people.
After the Perth-based company was unable to complete a $185 million contract, a liquidator was appointed for the Kiwi branch of the company, with many unpaid contracts left in the lurch. According to reports, the company had liabilities with a book value of $11.9 million, with $11.7 million of that trade creditors. It was reported that more than $41 million was owed to 262 smaller creditors, including several sub-contractors.
In New Zealand, the company held contracts with the Ministry of Defence and Ministry of Education. It had been working on the construction of several schools across the wider Auckland region. The unfinished projects led to more than 100 children beginning the new school year in prefabs or temporary classrooms next to the building site, while the Ministry of Education looked for a new firm to complete the project.
The company’s eventual liquidation was put down to poor organisation and management of work. While this is not an uncommon story, there is a way forward.
Regulation Considerations
In June, the Construction Contracts (Retention Money) Amendment Bill was introduced to Parliament with the goal of strengthening and clarifying the retentions regime under the CCA.
As explained by The Building Disputes Tribunal, if passed, the Bill will mean an increase in administration involved to manage retention funds. This, coupled with hefty penalties for non-compliance, further fuels the case for digital transformation.
It’s no secret construction firms are feeling immense pressure from a variety of angles – with supply chain challenges, worker well-being and skills shortages weighing heavily, not to mention the impact of rolling lockdowns on the ability to complete projects on time.
The retention regime amendment bill may spur construction firms to make critical upgrades to existing business processes to mitigate the risk of fines for non-compliance.
Outdated IT and Lack of Digital Compliance
Construction companies often cite payment issues and collaboration between stakeholders as a primary challenge, and tiered retention in New Zealand presents an added complexity and risk.
That’s because companies are required to make retention calculations on the initial contract, but it often needs to be updated throughout a project timeline. It is critical calculations are correct as it dictates payment schedules for the entirety of each project.
Digital tools provide a valuable tool for boosting collaboration and communication between stakeholders to minimise the risk of disputes over claims, boost productivity, reduce project overruns and improve overall operations.
A recent nationwide BDO survey looked specifically at challenges facing construction industry leaders and found retentions and reporting top barriers to success. The researchers claim improvements in the number of companies saying they fully comply with regulations and an increased awareness of the importance of due diligence and inspecting client records to make sure retentions are held securely. However, many companies are still slow to put this awareness into action, with 70% of respondents saying they haven’t asked to inspect their customers’ records.
A report by Frost & Sullivan entitled ‘Connecting the Construction Workplace of the Future’ 2021 also found around 33% of Australian and New Zealand respondents had deployed digital payment tools, but adoption has been inconsistent. Around 30% mentioned the continued use of spreadsheets and similar applications for carrying out payment data management systems despite being aware of the benefits of digital solutions.
We know that businesses working with manual systems or outdated IT are more likely to suffer issues that have the potential to impact their overall performance, so what is holding them back? The added challenges of a continuing COVID landscape and the propensity for businesses to succumb to pressure around margins and cashflow is likely to reasons but equally reasons why a heightened focus on digital tools and solutions as pressures on, and within the industry, continue.
Why Technology Tools Should be Toolbox Essentials
Technology that better supports tiered retention, automated calculations and time-stamped details that are easy to use with an intuitive dashboard can help ensure subcontractors are provided with a payment schedule in a timely manner with details logged accurately and policies and regulations adhered to.
Broadly speaking, investing in a digital project management solution can have direct impacts on cashflow, improve costs and margins, heighten confidence of key stakeholders (from financiers to regulators), identify potential issues early, provide a digital trail of tasks completed and billed for and free up resourcing in a talent stretched market.
The challenge for some is understanding the best solutions and what best suits their business. Now is the time to start the journey for future proofing the sector for when the inevitable challenge but also growth opportunities occur.
Tony Simonsen
Chief Operating Officer
Payapps
