Surety Bond Professionals is a family owned and operated bonding agency with over 30 years of experience. With access to a broad range of surety markets, our expert agents are ready to assist with all of your construction bond needs.
What Is Fintech?
Fintech (short for financial technology) is defined as technology that seeks to improve and automate the delivery and use of financial services. It has expanded from its origins in automating the “back office” operations of banks and other large financial institutions. It is now used by companies in many sectors to manage their financial operations and processes. In recent years Fintech has been gaining traction in the construction sector.
Key Financial Services for Construction
There are three key financial services in construction in which value is estimated and exchanged—payments, lending, and insurance. All three involve significant pain points for construction contractors and other stakeholders. Contractors, suppliers, workers, project owners, investors, and lenders all want the same outcome: on-time completion. But at the same time, certain conflicts of interest that are baked into the process can prevent them from achieving that shared goal.
Conflicts of Interest
For example, contractors want to be paid based on tasks completed and milestones reached, but lenders authorize monthly draws based on an estimated percentage of the project completed, which can result in cash flow issues and conflicts between general contractors and subcontractors. Workers expect worksite safety, while contractors worry about being held personally liable for damages from job-related injuries that are beyond what workers’ compensation insurance covers. Owners, investors, and lenders have their own concerns about lawsuits arising from construction defects that might not surface until years after project completion. Fintech is most successful when it mitigates the risks for all parties.
Fintech for Payments
The overarching problem with regard to payments is the current process of retrospective verification of draw requests submitted by contractors. Typically, this is a labor-intensive process of checking hundreds of pages of documentation—invoices, emails, etc.— against drawings and schedules to determine the percentage of completion. It may entail negotiations between project owners and contractors and multiple levels of approval. Fintech currently exists to expedite the payment process through real-time verification using digital data collection and communication. Fintech companies have the potential to provide an end-to-end automatic verification and direct remittance process.
The other key aspect of fintech for payments in construction is the automation of the process through which contractors receive and process subcontractors’ applications for payment. Until very recently, that process has been largely manual. One survey found that the majority of general contractors spend more than 20 hours per month managing subcontractors’ applications for payment, with most of that time devoted to collecting information from subcontractors. General contractors also are increasingly using electronic fund transfer as the primary method for paying subcontractors. The primary reasons for automating the tasks involved in paying subcontractors are improved accuracy and decreased time.
Fintech for Lending
Construction loan management can be complex and time-consuming for lenders, particularly for lenders relying on manual processes. Fintech companies offer products to build solutions for construction financing on development projects and corporate financing on construction businesses. In the construction sector, lending intersects with construction project management, financial management, progress monitoring, BIM, lien waivers, change orders, draw requests, and more. Tracking budgets, inspections, due dates, and drawing information based on spreadsheets is unwieldy and leaves much room for error. Fintech products can provide greater visibility into project status at the task level and payment remittance at the supplier level while improving efficiency and accuracy.
Fintech for Insurance
Fintech for insurance in construction aims to improve underwriting and reduce claims through better risk assessment and risk management, which can drive premium costs down. New uses of technology to manage insurance needs in construction are being introduced at an increasing pace. Drones, wearable monitors, and other technological devices can collect data to help identify potential risks on a job site. AI tools can analyze such data to determine what future risk events could occur. The near-term goal of fintech for insurance is the development of site risk management platforms that provide insurers with a deep understanding of construction companies and their unique risk profiles.
Final Thoughts
Construction technology has been integrating design and engineering with construction and revolutionizing what happens on the job site. Financial technology aims to bring the same kinds of advances to the financial aspects of construction management. The digital transformation of construction is well underway, and the resulting improvements in performance, safety, and management will help contractors increase their bonding capacity and support their ongoing growth.
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