February 2019

Construction Industry: Q&A with Industry Experts

10 minute read

Learn about current challenges, and get insights and feedback from leaders within the industry

“Cash is king” in the construction industry, and that will remain the case, especially if we consider its constant need to finance large projects, withstand long collections cycles and manage cost overruns. Not only that, but construction also requires substantial investment to enable growth and modernization in an ever-competitive environment.

Improving cash flow throughout the industry is a must and will require a cultural shift. It demands an increased focus on finding new efficiencies, driving change internally and taking responsibility for improving the interactions between project and industry partners. The benefits are significant for everyone.

Paul Raboud - Director of the board at Bird Construction and past chair of the Ontario General Contractors Association, and Bill Black – President at Calgary Construction Association, answer relevant questions about challenges to cash flow and provide insights on the changes that should be made in the construction industry.

Paul Raboud

Director of the board at Bird Construction and past chair of the Ontario General Contractors Association

Will the ongoing impact of prompt payment legislation be easily adopted across project value chains?

Prompt payment legislation was driven by demand from subtrades and suppliers. It was designed to have an impact on the trades, and I do believe it will translate up and down the value chain.

There are two things this legislation does: One is in respect to cash flow and the payment timeline. An owner has to pay an invoice within 28 days, the general contractor has to pay within seven days, and down the chain. This will probably have a limited effect—or the effect it does have will just be a function of how much it encourages a change to the culture of payments in the industry.

The second thing the legislation provides is adjudication remedy. That, I think, will actually have an impact on cash flow. Now that people have the option of adjudicating, owners are going to deal with issues more expeditiously because there is a credible alternative for a payee.

Overall, prompt payment legislation will benefit subtrades more than others in the payment chain. They’re the ones who are most likely to see an improvement in cash flow.

In my view, the ultimate point of the legislation is to change the culture. That’s what we want — the cultural change where everybody works together and cooperates. A formally structured litigious construction environment does not promote efficiency.

What are the top actions that small and medium-sized companies can take internally to improve their own position and performance?

There’s a rich opportunity to shorten DSO just by streamlining your receivables’ administration. It’s amazing how many payment delays could be resolved simply by reading what the contract says and submitting the proper pieces of paperwork. Most projects have a procedure where you can pre-vet an invoice with the owner so it doesn’t get rejected.

The second thing I suggest is involving the operation folks in the collections — people like the project manager — instead of some faceless department in one company speaking to a faceless department in the other company. I don’t think it’s fair to put it off on a collections department or on receivables because they just don’t have all the tools. I am stunned at how effective it is when an operation is engaged in collecting bills.

People need to understand that the culture of the company is, “We collect our bills on time, and that’s how you’re evaluated as a project manager. It’s not just getting the job done on time; you are also responsible for collections.” And that needs to be communicated to the owner: “We’ll do our part, but you have to do your part as well.” When that respectful relationship gets built, owners will pay on time. The cultural change has to be on both sides.

What other industry-wide changes are needed to address endemic problems?

There’s an amazing amount of process and information flow required to construct a project. The degree to which we can systematize and streamline these processes will make a big difference. The potential to speed up the flow of information and to reduce the number of coordination issues between the mechanical, electrical and architectural and structural drawings, and to be able to disseminate that information and improve coordination, is ultimately where we need to go.

To have better cash flow and profitability, it’s essential to improve the quality of the documents and the planning upfront. Planning is much more economical than jackhammering after the fact, or 20 workers standing in the field not knowing what to do because something hasn’t been properly organized.

The quality of the documents in construction makes an enormous difference. When you have poor-quality drawings and documents, everything gets bogged down. There are change orders back and forth, and endless disputes. This requires extra communication, which delays the schedule.

There’s a constant downward pressure on price for consultants on drawings; everything is faster than it used to be. As a result, designers have less time to perform, and less money because it’s so competitive. But the quality of drawings makes a huge difference in terms of the success of these projects, and ultimately the profitability and cash flow. My advice to owners is to focus on procuring a quality design, not on minimizing design cost.

Something we’ve been pushing for as an industry: quality-based selection when picking consultants, instead of the government owners picking the cheapest consultants. It’s about the value you’re getting for the dollar. It may not be the cheapest bottom line price for design, but it’s the best price that matches up with the best service, which will result in savings for the overall project.

“Overall, prompt payment legislation will benefit subtrades more than others in the payment chain.”

Bill Black

President, Calgary Construction Association

Will the ongoing impact of prompt payment legislation be easily adopted across project value chains?

It won’t necessarily be easy. I think it will take a long time, and not everybody will be happy with the method that’s used. Each province is doing it their way, and consistency might be a challenge. But it’s still going to be progress. The legislation is a positive step — it sets a standard.

However difficult or drawn out prompt payment may become, the alternative of having no legislation is continued stress, especially on small to medium-sized contractors. You cannot afford to be financing projects while people take their time paying.

Quite frankly, too many entities have decided that not paying their bill is a form of leverage on suppliers of construction services, consulting and trade contractors. And some people will not want to give up that leverage.

What are the top actions that small and medium-sized companies can take internally to improve their own position and performance?

They have to look at their businesses as businesses. I’ve seen a number of organizations that have pursued work based on volume as opposed to profit. But to survive in a tighter and more demanding economy, there needs to be more of that profitability focus because at the end of the day, volume is not enough. You need to say no to bad work. Don’t work for people who don’t pay. Don’t work for people who don’t manage projects well, because it will cost you money to deal with the problems on site. You need to get very, very good at knowing your costs, knowing the difference between good and bad business, and chasing profitability rather than volume.

What other industry-wide changes are needed to address endemic problems?

The industry needs to continue to think about diversity, especially in terms of more women in the industry — we still tend to be male dominated. Our industry needs to think carefully about succession, about how to make construction an attractive prospect for high school kids to enter construction as a career path. The stereotype of construction is, “If all else fails, I can always become a construction worker.” It’s unfortunate that it’s looked at as a last resort. I don’t think we’ve done a very good job with advocacy and PR for our industry, and what a great opportunity it can be for young people, for women and for new Canadians.

One of the things our industry is not very good at is collaborating across all the disciplines. General contractors, trade contractors, architects, engineers and owners do not spend enough time learning how to collaborate. So initiatives that allow all the different stakeholders to get in the same room and discuss industry issues are important.

For example, Calgary’s Owners, Architects, Engineers, and Contractors Group is an attempt to get all of these different entities in a room to discuss the issues that are impacting each one of us — to try to create the dialogue and initiatives that will allow us to perform better when we end up on the same project.

Another issue is the lack of technological aspects in our business. Our industry needs more innovation, and the trouble is that when everybody’s struggling with shrinking margins and profitability, it becomes difficult to invest in that innovation because it’s non-billable hours.

We need prompt processes as well: processes for approving invoices, approving work and managing quality. And these processes cannot contribute to the time constraints over getting paid. So we need prompt processes and prompt payment legislation where people are held to a certain standard.

Part of the problem is that nobody builds software for eight-person companies. We need an Autodesk-like organization — something that is large and scales up and scales down. So, there is a trade contract or portal and a trade contractor scaled component, and you could begin to create an effective model where the trade contractors are paid to play a nominal amount that feeds into a bigger subscription. The benefit of this is that we all have a system that plugs up to one master system, and the flow of money, information, requirements and communication is all consolidated into one platform. What a difference that would make!