This week we’re looking again at issues that keep coming up but shouldn’t. These are business practices that can cost you money.
Changing Payment Schedules
A sub signed an agreement with one or more large homebuilders to do work on homes being built. The price was negotiated, most of it on a square foot basis, and it was agreed that the sub would be paid every 30 days. Depending on material prices and the company needs, this agreement can work if necessary.
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But the agreement was arbitrarily adjusted by the general contractor to read “30 days after receipt of invoice” and then a few months later it was “60 days after invoice.” A few months later, you guessed it, it went to 90 days and then 120 days. All these changes were done on a “take it or leave it” basis. “If you don’t like it, we will find someone else to do the work.”
The subcontractor hadn’t been marketing and was worried about walking away, so they took it. They took it big time. Several of the general contractors went bankrupt and other generals were way behind on their payments. The sub was owed in excess of $100K.
If you agree to play this game with the big guys, be prepared to take it right where it hurts. General contractors who pull this stuff are usually not charging enough for their work. If they were, they could pay their bills on a regular schedule, like every two weeks. Instead they’re bribing the little guys (the subs) with work, then asking them to finance the jobs.
One of the early warning signs of financial problems in a construction company is an inability to pay bills, as I outline in Markup and Profit Revisited (Chapter 11, under “Warning Signs”). Insufficient cash flow is a leading indicator of bankruptcy. This scam boils down to exactly that: a lack of cash flow.
If you are a sub and are dealing with this, how do you get out? Read your agreement carefully and make sure you know the rules you’re signing on for. Have your attorney check the agreement if you have any doubts. Offer a revision based on the payment schedule. For example, “If you want 120 days to pay, or if you want retainage, this is the price. If you pay us on our schedule, within three days of completing our work, you can have a discount of xx%.” Make the discount whatever it takes to reach the price you need to cover your job costs, pay your overhead, and meet your profit needs.
If the payment schedule is adjusted after you’ve started a job and they aren’t willing to pay what’s owed, file liens ASAP. You must protect your right to be paid no matter what. They are adjusting the payment schedule because they have a cash flow problem. There’s a good chance it won’t get better. If you don’t want to get burned, file your liens. Do what you need to do to make sure you get paid for your work.
We’ll Pay You When . . .
This practice continues to be popular. On contracts for work to be done, there is a clause that says, “We will pay you when we get paid.”
Don’t ever sign an agreement like that. It’s nonsense. It’s also been ruled illegal in many states. Even if the practice is legal in your state, it’s just another method of getting you to finance the job for a GC, architect or project manager who is running the job.
Do you have any say in when the general contractor gets paid? Do you have input into their payment schedule or influence with their client? Don’t put your financial stability in the hands of those who might not be as concerned as you are about getting paid.
Maintain control of your payment schedule. Get a down payment, get progress payments and keep your final payment to 2% of the job price regardless of who you are working for. If you aren’t paid on time, shut the job down and file your liens. Run your business like a business, not a hobby. And expect the same from those you work for.
Comments from Michael
Most of us work so we can earn money to take care of our families. Yet all too often, those in construction who are working hard don’t notice things that bleed their company dry and prevent them from getting ahead.
That’s why education matters. In our newsletter, our books, our classes, our coaching, we go over the little things that can cost you money. And we discuss things you can do to keep your profit in your pocket. We know that if we give you good advice, good help, good assistance in running your business, you’ll remember and come back again. And maybe even bring a friend. When you succeed, we succeed.
Education is the best insurance you can purchase for your business.
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.