May 23, 2023

Payment flows in construction

For the last week I was working with a founder team in the construction cash flow space. It triggered me to look deeper into the payables, receivables and cash disbursement workflows in the construction industry in the US and UK markets.

Last month I had first referred to a guesstimate that up to 55 billion invoices might be issued every year across construction markets.

Working with the abovementioned founder team, I dug deeper into this number and had wanted to cross-check and substantiate it further.

I’ll work the number per project through a rough top-down estimate:

Now let’s extrapolate to the number of construction projects:

The 1’500 invoices and 6’000 book entries mentioned above happen over a 15 months timeline. We need to scale them down to 12 months:

That’s a lot of cash flows and paper. Here’s a few big issues with this many invoices and book entries:

We know that construction is a $10 trillion global market. Let’s say on average, there’s 30 days of working capital in the construction system. That would amount to $10T / 360 x 30 = $830B of construction working capital.

To cross-check whether this number sounds directionally right: that would be ca.:

While these numbers won’t be accurate, they are in the right ballparks.

Now imagine you could eliminate one pass-through party in the construction invoice chain, and find a way to pay suppliers more directly. Thus you might be able to reduce the invoices and wires by as much as 50%, which would reduce the working capital by proportionate 50%, or as much as $400B globally, $60B in the US or $20K+ on an average residential project.

To summarize:

What I find interesting in this context is: Who bears the burden of these numbers? While the usual answer is the sub-contractor, I actually begin to think the long tail of developers bear the biggest pains. And their pains from these numbers are more painful the…

That’s why I have become enamored with solutions fixing invoices and wires in the cash flow chain starting with real estate developers downstream to sub-contractors.