A specialty contractor recently told us they were having problems collecting down payments from general contractors. The lack of down payments was causing cash flow problems, which makes sense. I talk about payment schedules in the book Markup & Profit:A Contractor’s Guide, and specialty contractors have the same issues that general contractors have: they need to order materials, often special materials, before the job starts.
This specialty contractor, working in the residential market, said that every time they asked for a down payment the response from the general was, “We are not a bank.”
If you’re a specialty contractor working for a general contractor who says, “We are not a bank!”, it’s time to find other generals to work for. The odds are good that the general is having financial issues or doesn’t manage their finances well. You might have trouble getting paid even after you finish the work.
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That general contractor is asking you to be the bank and that’s not right. If they were conducting business as they should, they’d be getting down payments on every job, progress payments at least every two weeks and a small final payment at completion. If they’re getting paid as they should, they’ll have the money so the subcontractors can also get a down payment or material purchase advance and eliminate their cash flow problems. That is fair.
Why would anyone put themselves in the position of waiting to be paid for the work that they did? Stop and think for a minute about all the problems that will cause for you and your company, not to mention your family.
The time to decide if a job is good, that you will be paid on time with no hassles, is before you sign any agreements with the owner of the property or a general contractor you might be working for. Don’t sign any agreement that states that you’ll be paid when they’re paid, or with retention clauses. And don’t start any jobs until these details have been worked out and in writing.
Most of our readers are contractors building under $5-10 million in sales each year, focusing on the residential construction market and not commercial work. If you wish to participate in the commercial field, then by all means, do so but recognize that the rules are different.
Smaller construction businesses often have a tough time participating in the games that the big guys play with money, such as retention and pay when paid clauses. I read that the average specialty contractor doing commercial work has to wait 54 days from the date of their invoice to the date they get paid. There is more than enough work in the residential market to keep everyone as busy as they want to be, thus avoiding the money problems associated with working in the commercial arena.
If you find yourself involved with general contractors who want you to finance their jobs, I strongly recommend stepping up your marketing and advertising game so you can migrate to a better class of contractor. Read Markup & Profit, then focus on markets where you can get paid in full, on time, and not have to worry about other people using your money.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations.
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