Let’s face it, insurers do not get a lot of respect following catastrophes, despite extraordinary efforts to satisfy their check-writing obligations. Even generous, instantaneous checks do not begin to crack the chaotic reconstruction problems that insurers, in disaster-affected areas, face. And then insurers often pay 30% – 40% more for “demand surge”. Demand surge is much more about how insurers execute payment than it is about actual construction demand spikes.
After Hurricane Andrew, the lack of event management (and the corresponding excessive cost to insurers) was eye-opening to me. But the lack of capital needed to move rapidly was most surprising. Despite insurers’ willingness to pay – and pay fast – cash flow was highly constrained on projects. Any potential purchasing presence insurers possessed was essentially diluted through GC’s and subs who have little or no financial wherewithal, poor payment history, and a relatively small portion of the work combined with lots of cash flow friction issues. The shortage of construction capital is not caused by catastrophes; it’s a pre-existing problem throughout construction.
Capital shortage issues impact the entire construction payment chain. Mortgagees delay progress payments to assure their assets are protected. Local material providers avoid offering trade credit to unknown contractors swarming the affected area. Without credit or cash flow, and with little ability to borrow adequate working capital, small contractors and subs constrain the pace of work. Payment moves slowly through a flawed construction payment chain, and the blame gets pointed at mortgagees and insurance companies.
By using the right financial technology to express highly controlled payment to the project payment chain, insurers can essentially leverage their obligation to pay. Material providers do not extend credit, contractors cash flow issues disappear and subcontractors working capital encumbrances are eliminated. The property owners recover faster on projects that pay faster, with less risk and the transparency only BuildPay financial technology funds control can provide.
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