OSAKA -- Japanese builder Daiwa House Industry will pay all subcontractors in cash starting in April, in order to foster better relationships with small-scale suppliers in an industry suffering from a major labor shortage.
The change will apply to payments made to suppliers and subcontractors of Daiwa and unit Daiwa Lease. About 40% of their roughly 100 billion yen ($887 million) in monthly payments are currently made in promissory notes, which take 90 to 120 days from the issuance date to pay out.
Switching to cash is expected to improve the cash flow of small and midsize subcontractors and help them secure qualified workers. Daiwa seeks to strengthen relations with suppliers to ensure construction projects get done, and get done well.
Daiwa has business dealings with 3,300 to 4,000 companies a year, around 3,000 of which are subcontractors. It is considering also adopting the all-cash policy at other group companies like general contractor Fujita and condo builder Cosmos Initia.
In order to make the change, Daiwa will have to borrow more from financial institutions. But the increase in annual interest payments will be limited to a few hundred million yen thanks to Japan's rock-bottom interest rates. And the company will no longer have to deal with the administrative work of issuing notes.
Japan's construction industry has seen a steady drop in workers as seasoned individuals age and younger generations shun its low pay and harsh conditions. But demand has been brisk thanks to redevelopment projects in large cities. Daiwa for one is receiving more orders for hotels and logistics facilities used in e-commerce.
Competitors like Penta-Ocean Construction and Taisei are making similar moves, either switching to all-cash payments or shortening the settlement time of notes to 60 days from 90 days. Revised guidelines from the land ministry in March 2017 encourage cash payments to subcontractors as much as possible.