Subcontractor Payment Schedules

An electrician sent us a note about subcontractor payment schedules:

I was reading your newsletter and had a question about what I read. This is the section…

“If you notice any of your sub or specialty contractors starting to ask for money as soon as they are done with the job, that can be a sign of financial problems. Take them aside and tell them of your concern. Tell them to give us a call if they are having problems. Cash flow problems, if not dealt with, can eventually cause your sub to go out of business and you’ll be looking for a replacement. It might also mean you’ll have to figure out how to finish any jobs they’ve started. Help them now and save yourself the time and money later.”  (from the July To Do List for Construction Company Owners)

My question is, why shouldn’t the sub ask & expect their money right when the job is finished? A contractor not paying right away is likely to have financial problems as well. Thanks for your time!

It’s a good question and one I’m sure others have had.

We believe in a fair payment schedule for all work done. Payment schedules need to be in writing, not just with the client but also between the general contractor and the specialty contractor. We have an example of an agreement for a specific project, including a specific payment schedule, in Chapter 7 of Markup and Profit Revisited.

In consideration whereof, the Contractor agrees to pay to the Subcontractor, in ___ payments, the sum of $____. The said amount will be paid as follows: $X deposit at start of install and $X at . . .                     

If the general and subcontractor are working together using a Subcontractor Manual (always a smart idea), the overall payment procedure the general contractor follows should be covered as well.

For {Company} to disburse payment for a contract or change order, the following conditions must be met without exception:
a. All licenses, bonds and insurance certificates . . .
b. Completion of all the specified work . . .
c. A statement showing . . .
Disbursement of all payments will be made only after the required conditions have been met. A minimum of three (3) days and a maximum of two (2) weeks after the receipt of the invoice and approval by {Company} management can be expected by the Subcontractor.

From a financial or practical standpoint, paying for work done the minute it is done or the same day isn’t usually feasible with a general contractor. It also shouldn’t be necessary.

There are any number of ways that a payment schedule can be set up. Let me share some thoughts here:

• If the general contractor received a down payment for the job, they should be willing to give the specialty contractor a down payment for materials and labor, ranging from 10% to 30%.
• If the general contractor receives progress payments, as they should, it’s reasonable to make progress payments to the specialty contractor. I don’t like the practice of paying the sub 90% at the completion of rough-in with the balance paid when the job is done. The sub is doing the majority of their work prior to receiving any payment from the general, in effect financing the general contractor‘s work. The sub is at risk of being burned if the general goes out of business.
• Progress payments at half, two-thirds, or three-quarters of the way through the project are okay, but they should be tied to the progress payments that the general contractor receives from the client.
• Final payment from the general to the sub should come after the job has been inspected and approved. Then, when all parties agree that the specialty contractor’s work is complete according to the contract, the specialty contractor gets paid on the next scheduled payment day. Payment days are normally on Friday and should happen at least every two weeks, preferably every week.

Now all these items assume that the general contractor and the specialty contractor know and trust each other. It also assumes that there is a written agreement between the general contractor and the specialty contractor to make darned sure there are no issues that come up about who said what and when.

The purpose of my statement in our “To Do” list is to remind general contractors that they need to be aware of signs of financial trouble with a specialty contractor. If the specialty contractor is in financial difficulty and it doesn’t get resolved, they’ll go out of business. That, of course, hurts the specialty contractor, but it also hurts the general contractor who now needs to find a qualified sub to get their jobs built.

It’s certainly possible that a general contractor can be in financial difficulty as well. We talked to subcontractors about that risk in another article. It’s our goal to help every construction-related business owner build a stronger business, both general contractors and specialty contractors in all trades.

It’s been our experience that when construction business owners, both generals and subs, are having money problems, they aren’t always willing to ask for help. They’re embarrassed and concerned that they’ll look stupid or like they’ve failed if they admit there is a problem. That’s unfortunate but it’s also human nature; none of us are comfortable admitting things aren’t rosy, especially when it appears like everyone else is doing great.

It’s also human nature to be reticent about butting into other people’s business. But if you sense there are financial difficulties, or if you aren’t getting paid for your work in a timely manner, talking to them about it could be both the kindest thing to do for them, and the smartest thing to do for you.

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