The construction sector is a worldwide industry that is responsible for developing the modern world’s landscape through different kinds of international projects and cross-border construction. From building a single family home to major infrastructure projects like airports, a profusion of stakeholders get involved: contractors, subcontractors, materials suppliers and project owners. These businesses often manage to meet the deadlines for the completion of projects by addition of the factor of profitability and, in order to do this, they need adequate optimization strategies that include management, cost estimation and cross border payments. Hence, international payment systems are integral to success, even if they may feel like a back office function. Companies that understand this thing, and that make the change towards modern processes will be more likely to succeed.
The Global Construction Business: A Multi-Layered Business Structure
The business model of a construction firm that undertakes international assignments is characterized by multiple interrelated layers and elements of finance and operations. Income comes from large contracts where payment is scheduled at certain milestones. These contracts can incur substantial initial cash outlays for materials, tools, labor and even logistics. The clientele can range from government organs, big companies to small private builders. The geographical scope is also extremely diverse, requiring companies to manage operations in multiple countries, each endowed with its own regulatory and socio-cultural terrain. These tend to be long contracts with spread out repayment periods and thus require a highly automated approach to control. Within this value chain also come a number of players, including architects, civil engineers, and other contracted professionals who have to be settled within the deadlines for the project to stay on schedule. Thus, the business model of the construction industry requires a robust and flexible financial structure capable of addressing the multifaceted nature of the world economy.
The construction industry is involved in different types of projects. Some of them are domestic projects while others are international projects. Construction companies engaged in international projects face several non-peculiar issues and these are as follows:
- Supply Chain Issues: Supply chain in the construction sector is very complicated because it requires cross border movement of materials and equipment through customs, tariffs and border clearing which sometimes adds onto the cost and cause a delay to the project. Information from WTO suggests that cross-border logistic lead times for the construction sector rose close to fifteen percent over the past five years. This has contributed to the raise in logistics cost in addition to delays on the projects.
- Legal obstacles: There are different forms of labor laws, international regulations and even building codes in different countries around the globe. Navigating through all these laws adds some extra work that requires due diligence and specialist expertise. According to the World Bank, Doing Business Report revealed that there was a wide variance between countries in terms of the average time it takes to get approval for construction. Some European countries had an average of ten days, whereas most parts of Africa took over a hundred days pushing up building costs by quite a margin.
- Financial Management Issues: Dealing with international payment systems inevitably adds more complications such as exchange rate risks, high transaction costs and the need to abide by different taxation regimes. Currency depreciation and delay in receiving payments can strongly affect a company’s profit margins and cash flow and hence its financial performance.
- Payment Delays and Disputes: The process of making payments to foreign business partners is often slow and costly, causing cash flow issues and court cases in breach of contract. ABI/ SWIFT documents show that lodged international payments usually take three to five working days to complete however more than ten days are required in regions with extensive banking and local regulatory systems.
International Payments in Global Construction Projects
International payment solutions are crucial for managing the complex financial operations of global construction projects. Efficient payment systems allow for timely disbursements to suppliers, subcontractors, and project owners, thereby ensuring the smooth flow of resources and minimizing potential delays. However, in many cases, outdated systems are still in use, which increases overhead and introduces a large amount of risk to the overall business. These payment methods directly affect profitability, by increasing costs, causing delays, and affecting the company’s overall cashflow.
There are several issues associated with construction wire transfers which are always tainted by high fees and transactional charges, which ultimately leads to a hit in the profitability margin as well as the overall efficiency of the business. These issues include:
- High Transaction Costs: As per GBTA, the fees and taxes involve mitten up costs which are around 5%, going hand in hand with the construction sector transactional models which are frequent and large scale, as a result leading to a significant impact on profits due to high fixed and percentage transactional fees.
- Currency Exchange Risks: As per the estimates from BIS, the hidden fees associated with foreign exchange can make true the illusion of volatility as the currency fluctuations can go as high as around 1-2%, which adds to the hedging costs making financial forecasting more difficult. With the foreign markets remaining volatile and without the presence of proper financial instruments, foreign banks remain out of reach of leverage.
- High Service Charges: A wire transfer takes a number of business days to clear, thereby creating a lag in transfer of funds which can impact project time frames and supply chain management as well. The Bank has done research and has demonstrated that international wire transfers normally take between 3 to 5 days, but due to inefficiency in some parts and varying banking systems, some areas take longer.
- Lack of Accountability: Payments are often impossible to trace or account for due to a lack of transparency in the traditional ways of doing payments with many hidden costs and fees that makes it hard for companies to do proper bookkeeping and manage their finances. The FSB has dealt with cross border payments and discussed the lack of accountability and transparency in dealing with such payments.
- Loss of Management: Unfamiliar tax regulations, guidelines for anti-money laundering, data protection and any other law within the country or outside can be extremely painful for firms whose systems are still outdated. Thomson Reuters has suggested that if construction companies use old systems, they will pay, on average 10-15% more on compliance issues, as well as pay more for fines and penalties.
New ways to pay: for effectiveness and transparency
The payment systems and modern platforms have simplified the finance function as they equip a number of tools that enhance control and transparency to all the payment processes. These include:
- Transaction Fee Minimization on Construction Payment Invoice: There is a higher privilege for profitability when modern payment systems are used by construction companies as they lower down the transaction fees involved in the process. More often than not, these systems involved making direct payments and a big reduction in the amount payable for services provided as intermediaries. A research by Deloitte notes that businesses utilizing the newer systems can decrease their transaction costs by an average of 20 to 30 percent.
- Payments Done in Real Time: There are some of the modern systems that are able to provide payment solutions done in real time which are a good example for faster transaction, improvement of cash flow and minimizing on delays. With this technology an advancement is greatly achieved as opposed to other older technologies such transfer through the banks which would take days to complete. Polaris Market Research indicates that organizations that utilize real-time payment systems are able to shorten the time accounts receivable are outstanding by approximately 40%.
- Automated Currency Conversions: Modern systems provide a more favorable exchange rate and allow businesses to protect themselves against currency exchange value fluctuations and ensure more certain monetary outcomes. According to the analysis made by the Bank for International Settlements, tools allowing automated currency conversion considerably help companies to minimize their risk of getting exposed to fluctuations in exchange rates.
- Improved Transparency: These platforms also increase the tracking of payments which gives businesses better control of their money that enhances the reconciliation processes and other financial issues. Financial Accounting Standards Board (FASB) discloses that more stringent management over expenditure patterns is advisable through enhancement of accounting and auditing procedures.
- Automated Compliance: Modern payment solutions also help to improve compliance with all international regulations, which greatly reduces the risk of fines and penalties. These systems automate processes and ensure businesses adhere to all relevant international laws and standards. A study by McKinsey, indicated that automated compliance systems reduce risks related to regulatory non-compliance by an average of 35%.
Objective: Cost Reduction and Efficiency Improvement
Construction companies wishing to operate internationally are offered great advantages by the implementation of new methods of making and receiving payments. These include:
- Automated Processes: Companies save lots of money and in turn earn more profits by cutting down transaction costs, loss on currency exchange, and by automating many processes and eliminating unnecessary tasks.
- Consistent Cash Flow: With instant payment processing, cash flow consistently improves. Moreover, suppliers and subcontractors are paid on time, which in turn removes unnecessary delays and enhances project schedules.
- Decreased Time on Admin Tasks: Streamlining of payment processes ensures a decrease in administrative time, allowing employees to focus on strategies for bettering the core of the business.
- Increased Insights: Tracking and analyzing the payments becomes easier due to the increased transparency, which guarantees better cost management and augmentation of financial strategy.
- Financial Security and Stability: With better compliance and fraud prevention mechanisms installed, a lower risk is attained which greatly enhances the stability of the business.
- Global Expansion: The use of modern systems promote growth in the number of transactions being done; thus, allowing for a better financial system which enables global expansion for the company.
Real-world examples: Looking into the Success
An Example sales business owned by a European construction company specializing in renewable energy was having obstacles with international payments that were causing delays and stemming their profits. They were also charged an average of six percent on each payment. Most of the potential abroad payments would take about five days to process which added up to more problems. After transferring to a modern payments platform they were able to lessen their transaction fees by three five percent, reduced the time spent on processing payments to less than twenty four hours and improved their cash flow by twenty five percent. The more modern systems enabled them to place bids on bigger projects, break into new markets, and dramatically grow profits and decrease operational risks.
An Australian construction firm specializing in infrastructure in Southeast Asia bore the brunt of inefficient manual payments across the multiple countries they operated in. They reportedly spent fifteen hours a week juggling through data that needed to be tracked, spending a considerable amount of time trying to manually reconcile the information. Their manual accounting processes ceased to exist after the switch was made, as the company fair and square cut down on being inefficient in resource allocation and financial control of all their transactions. This allowed them to obtain greater clarity with all their financial processes. All these changes showcased how transformative modern work systems can be for a firm.
In the words of Anthony Bridges, Chief Finance Officer at Collect&Pay, modern payment systems are an amalgamation of deteriorating boundaries with regards to geographical space, time or number of intermediaries. He states: “Given the increase in international competition, timely and effective payment solutions will be a prerequisite, not an option for construction companies looking to internationalize.” From the perspective of a company operating at an international level, this allows multi dimensional strategic advantages.
The global nature and the inherent complexities in the operational processes in the construction sector call for new ways of handling finance. The adoption of new payment solutions internationally, like Collect&Pay, is not only about cutting down on costs and wastage but it is a core aspect that helps Businesses optimize operations, increase profit margins and grow in a sustainable manner. With the use of modern platforms Companies will be able to establish a solid foundation for robust and sustainable operational success in this competitive and demanding environment. It is the Firms who will do well within this new market that do invest in a new era of opportunities.