On Time Pay is a Privilege?
This is a subject I’ve struggled with for my entire time in the sub-contracting business. When are we as sub-contractors going to demand we get paid in a timely manner? I remember the day fondly when we hung our shingle, when we thought we are going to be better and faster than our competition. Our customers helped us out, they paid us when they received the invoice. (look at what I’m doing in the sentence above, I’m so programmed to appreciate pay when the work is complete that I thank people for it. That should be the norm not the exception).
Should 60 to 90 Terms be the Norm?
Then something happened around our 5th year in business. Customers stopped paying within terms, stopped paying in 60 days. I know I’ve heard this said before “fire your customers” well that’s easier said than done and it went deeper than just firing our customers. It felt, it feels like a systematic attempt to strangle, to use every single sub-contractor for financing until they can’t finance the projects anymore. I’ll get to a more concrete reason why I think that a little later.
Some Reasons Real or Not for Slow Pay
So pay continued to slow down. I’m going to give you some of the reasons that general contractors, owners, school boards etc., give for slow pay and some ways to speed things up. I will say that even the most diligent subs will have a tough time cutting through the red tape. Red tape I truly believe can only be handled by very strong legislation.
- Jobs almost always start too late in the month to get in a draw to pay for material and labor for the first month. So you almost always get kicked into the following month for your first pay request. I’m sorry I wish I could give some witty bit of advice but there is very little you can do in this situation. Especially with projects below 100K. Very few architects or owners reps will let you bill for mobilization so you end up out of pocket for most of the job.
- The deadline for getting in invoices in to the owner is the 10th of the month (pick a date they are different for every job) and yours came in on the 20th so we couldn’t get the invoice processed this month. The most obvious thing to do in this situation is make sure you have the invoice date correct so you can invoice right away. By the way if your trade is one of the prime subcontractors on the job they all know you’ve done work. A good GC can put you in the draw for something or will call and ask you for an invoice so they can put it in the pay request.
- This one sort of ties in with the previous. So you manage to make the invoice date and you get your progress invoice in on time. (A progress invoice is an invoice that estimates how much of the project is complete in your trade. Most times your work is broken down into phases, i.e. below ground waste and vent (labor and material) above ground waste and vent (labor and material), water piping (labor and material) etc.) The architect approves or denies the invoice, if it’s denied it can be kicked back and into the next months draw, further delaying your money.
- The next fairly common occurrence happens when working for schools during the summer months. Contractors and sub-contractors are entirely at the mercy of the school board and when they meet. Let me explain a little further, let say a school project starts when the kids get out of school on June 1. You mobilize, buy the material for most of the job because it’s only a three month job and you start to work. You get the invoice in at the end of June and you work through July, finally you start to ask when you’ll be paid. After asking and digging you find out that most of the school board members where on vacation during June and July and didn’t plan on meeting until August 15. If they approve all the billing you’ll get you’re money two weeks from that point 90 days after you started. This is the norm not the exception. We haven’t even mentioned what happens if the billings are not approved and that is not uncommon.
The Projects are Built Complete with No Funding
Over the last 13 years it happens more often than not that when dealing with $100K jobs and less we are done with the project before we ever see a penny. So the owner gets their entire construction project financed by the sub contractors. The general contractors feel some of the pinch but because they all have “paid when paid” clauses in their contracts to the subs, they never have to pay their bills until they get paid by the owner, regardless of your terms to them. You can make some alterations to GC or Owner contracts but you will never have them strike the “paid when paid” clause. Remember this doesn’t even address a general contractor that feels like sitting on the draw for 30 days, which happens quite often. Remember to watch your lien rights it differs from state to state. We find the only way to get an owner off dead center is to threaten to lien the building. When dealing with tenant build-outs it is a very powerful tool because most tenants can’t have a lien encumbering an owners building, it is part of their lease agreement so the tenant runs the risk of getting booted from a property if they don’t pay their bills.
Sub-Contractors Act as Another Line of Financing.
By far the most sobering event that happened in the last two years was when we received a package from a fairly good customer. The package came with a letter basically saying “During these tough economic times we want to check the financial strength of our preferred sub contractors. We would like to see a set of your most recent financials along with a letter from your bank telling us what your line of credit is and how much is left of the line.” Along with this letter (you can insert a drum roll here) there was a letter from their bank saying “ blah, blah, blah Construction Company has been a valued customer of the blah,blah bank for over two decades. They have a high seven figure line of credit that they have never tapped into.” I read it over and over again as my blood pressure went through the roof. For the last 13 years that we had done work for them they had never paid us in less than 75 days, we borrowed money for every project and they never went into their own line to pay us on time. This wasn’t a letter to check the financial strength of their subcontractors, it was to check which subcontractors could still finance their projects. Use them up and move on to the next batch.
State and Federal Intervention
The Federal government or individual State governments need to pass legislation for prompt pay with teeth. We have to pay our bills faster than ever, the banks won’t loan money for operating expenses and the owners just flat out refuse to pay in a timely manner. An old and wise friend once told me “never be embarrassed to ask for the money you’ve earned” unfortunately sub contractors are forced to beg these days for the money they’ve earned and it has to stop. So contact you’re local politicians and stomp loudly that you want to be paid on time, maybe if enough of us stomp loud enough someone will listen.