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As ENR has reported recently, slow payment can and does sap a contractor’s strength. Slow payment puts a contractor in a serious bind. On the one hand, it is getting paid, so why rock the boat? On the other, the contractor has to pay the down-line subcontractors in the time specified in those contracts regardless of the payment stream from the owner or general contractor.
Most of the time, a contractor has a choice, walk off the project and face the consequences, or hope that its credit holds up and it can survive the slowdown. This choice is one that a contractor or subcontractor should have to make, but unfortunately, construction professionals face this choice on an all too regular basis. The recent economic slowdown has not helped. Owners and “up line” contractors are seeking reasons not to pay on time to hold on to much-needed cash as long as possible, and the down line folks bear the brunt.
This reality makes good collection practices a key to a successful construction business that will survive this downturn and thrive in the future. The following two tips should help Virginia, and other states’, contractors to create a better environment for themselves and keep from having to pay money that they do not have. The first is the regular use of 30/60/90 day letters. As soon as 30 days hits, the first “reminder” letter should go to the contractor or owner that owes you money. At 60 days, a firmer letter should go out letting the party that owes you money know that a lien is going to be on its way to the courthouse should payment not come in the next week. Finally, the 90 day “letter” (at least in Virginia) should be the mechanic’s lien notice. Once you have a reputation as a subcontractor or contractor that will follow through in this fashion in a business like fashion, those upstream from you are more likely to pay you when they get a chance.
For protection from paying money that you have yet to be paid, a “pay when paid” clause is necessary. In Virginia, this clause must be very specific and make payment from the Owner or General Contractor a prerequisite for payment of your down stream subcontractor. Merely stating that payment will come x days after payment is not enough. Having this clause in your contract will go a long way toward protecting your payment side much as a good and consistent collection practice can protect your collection side.
Like with anything else involving legal subtleties like these, please contact an experienced attorney who knows construction to help you draft your contractual provisions and make sure that your collection practice meets your state’s mechanic’s lien laws.
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or most subcontractors, particularly on public projects, they are forced to sign such onerous contracts that the GC can not only pay late, but pay less than the current RFP. Particularly in this climate, subs are so eager for work, that they will sign any contract to get the job. I recently had a client who was put out of business by the GC because his RFPs were not being submitted on time, and money was withheld due to a potential claim by his sub. I don't have the answer to this, but I agree that most construction companies do not mind the business aspect of their work as well as they should.
July 6, 2009 8:12 PM
It's always been a tough spot for subs, but this economy just highlights their situation. If they don't bow to the GCs terms, someone else will instead (usually quite happily).
GCs are not much better off, as they end up whipsawed between slow-paying owners and the subs who relied on their reputation as a solid GC when signing the job.
Of course, everyone – including owners – is facing serious contraction in the credit markets.
Something has to break this loose. As I originally noted, this has never been a smooth process for all players, but the economic hiccups are exacerbating the problem and putting many projects and businesses under.
Like Andrea, I don't have a silver bullet either. But protecting every receivable, even if it means straining a relationship, is one key to survival in this climate.
Leigh and Andrea,
Thanks for the comments. While there is no silver bullet, the best a contractor or sub can do is draft their contracts in a way that best protects them.
Your insights are always helpful.
Subs rountinely fail to use 43-11 letters – a great tool to make sure you are paid on a timely basis.
GAR
Good point, these can be a great tool to keep the owner on its toes.
What is the 43-11 letters?
Thanks
The 43-11 letters are essentially early warning letters to an owner that puts them on early notice of the possibility of a lien. Check out the Virginia Code site (Google it and it will come up) and find 43-11 for mote.
.-= Christopher G. Hill´s last blog post .. When a Subcontractor Should Walk Away =-.
The real kicker with the 43-11 notices is that they can provide a path to personal liability. The real downside, and the real reason no one uses them, is that they provide a path to personal liability. As a lawyer, I love the concept, but from a business perspective they are salting the earth in the relationship with the contractor.
Too true Tim. However, sometimes they are necessary, especially in this climate of unsure payment due to the economy. But I agree, they need to be used sparingly.