Is Construction Finance the Next Big Thing in Early Pay?

Until recently, providing finance to the construction sector has been complex and risky. There are many unique challenges involved with financing to construction receivables

  • Contract terms—construction contracts often include terms such as “paid when paid” and “paid
  • if paid”.
  • Progress payments—for larger/longer jobs, most contractors are required to bill as they progress throughout the project and reach certain milestones.
  • Retainage —most general contractors will withhold 5-10% from each billing until the entire project has been completed.
  • Liens - The challenges around lien releases are numerous for specialty finance companies. Laws can change, notices need to be filed, timing matters and state laws differ.

But with more automation to manage the complex world of construction finance, things are changing. Automation from companies such as Aconex, Textura (now part of Oracle), and HPD software’s Aquaris product provide platforms to manage General Contractor – Contractor – Sub Contractor service agreements.  Automation helps complex projects move away from spreadsheets, and provides an effective repository of contract details and payment arrangements that can be leveraged to inject liquidity into a multi-trillion dollar global industry sector.

Systems now can name details, including VAT numbers, bank details and other data pertinent to facilitate KYC compliance. Sub-contractors can have multiple service agreements and facilities can be set up with various limits and fee structures to facilitate payment.  Automation can help store contract details, funding arrangements, etc.

Application for payments can be made by the sub-contractor once a percentage of payment is completed and or materials are supplied to a site that is paid for directly by the sub and not the General Contractor.

The recent acquisition of Oracle by Textura, who offers Construction Payment Management via Greensill Capital, enables contractors to select the eligible projects and subcontractors for finance.  One of their clients, Alston Construction CFO Adam Nickerson commented, “The construction industry’s long and unpredictable payment waiting periods can be a real challenge for subcontractors. We see in EPP (ie, Early Payment) an opportunity to address this long-standing issue and help our subcontractors to prosper and grow their businesses.”

There is more interest in the funding community with this sector given technology adds new data flows that can help monitor risks.

Its officially summer, and we expect this sector to continue to heat up.

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