Construction contractors are expected to adhere to schedules, not go over costs, keep change orders to a minimum, do a thousand other things correctly, finish the project on time – and they wind up getting paid late, last, or not at all.
This isn’t new. The late payment problem has existed for a long time, and a great many construction contractors have been damaged in the process, particularly in cash flow. Subcontractors and building materials providers expect to be paid. Contractors fronting the money take a risk, even more so if the owner isn’t altogether scrupulous.
“Contract Simply,” in its Construction Payments Report 2018, shared data that highlights how big a problem are late payments:
- 83 percent of contractors have filed liens over slow payments.
- 42 percent wait 30-60 days for payment; 46 percent wait 60-90 days.
- 46 percent tap personal credits lines or savings to meet payments and cash flow.
- 70 percent would offer a discount for net-30 days payment.
- For the full Construction Payments Report 2018 click here.
Why are contractors so often in this position? A multitude of reasons, among them that the longer owners hold onto their money the better it is for the owner, the owner is in their own cash flow problem, the contractor doesn’t fuss to avoid a reputation for being “difficult,” they hope for additional work from the owner, the contractor knows he or she hasn’t been as accurate as they should be with their paperwork and documentation, and more.
Owners and the contractors have the same goal: control expenses and make the most profit. Late payments may stem from bad communication, faulty communication, miscommunication, or inaccurate communication. The key is good communication in all things: contracts, schedules, invoicing – and every other aspect of the job.
The more fog in information clarity, the greater the chance to get lost in it. Contractually set out – in clear and specific language – what is expected of you as the contractor and what are the responsibilities of the owner. Utilizing standardized AIA invoice templates is a great start.
Arrange specific dates for invoicing and what will be reflected in the invoice. For example, a notation for “cement delivery” is insufficient: what quantity of cement, it’s purpose, along with time, date, and subcontractor, delineates clearly the who, what, and when, on the invoice. It’s also proof to the subcontractor, if necessary, that the service they performed was billed to the owner.
It's not uncommon for project scope or requirements to change, depending on an owner’s previously unanticipated needs or desires. These must be documented within a format that enables you to prove it was specifically requested. Handshakes, or “Sure, we’ll take care of that,” don’t count. Not unless you want to risk paying for them.
Lack of invoice clarity is one of the biggest problems faced by contractors in dealing with headstrong owners. In some cases, all an invoice needs to be bounced back to the contractor is a spelling mistake, a simple math error, an incorrect address, or an unclear entry for which more information is requested. Each bounce-back delays payment – and endangers the contractor’s cash flow position.
Ensure to the maximum extent possible that you don’t enter into a situation in which you don’t have a clearly-written contract or that in any case you agree to be paid only at the end of the project. You’ll be responsible for all the payroll, subcontractor, materials and other expenses – and what if at the end the owner say’s, for reasons fair or foul, it’s not completed, or not completed to his satisfaction? The payment delay could be devastating. The more specific the arrangements on the front end, the less trouble on the back end.
Agree, or at the very least, give notice within the terms of the contract, at the beginning how often you’ll invoice – and then, be consistent. Early, late, or incomplete invoicing can be the basis of late payments.
When the owner is late, give them notice. A friendly phone call is a good start to put the reminder in front of them without raising the tension level. If that fails, written notice via a letter is the next step, specifying the owner’s payment responsibilities under terms of the contract. If there is no response, or they are arguing terms of the contract, you first might let your outside construction accountant deal with the owner or the owner’s finance department. If that fails, it’s time to engage an attorney.
There are various types of liens available to contractors, such as a pre-construction lien or a mechanics ‘lean. The lien waiver eases – under careful conditions – the threat of a lien on the owner’s property in return for prompt payment under mutually agreed-upon terms.
A mechanics lien, or contractor’s lien, encumbers the owner’s property until the issue is resolved. This is a more involved process. A lawsuit is the final, most time-consuming, and expensive option.
When you get into the legal notice letter, mechanics lien or beyond, that’s the time to bring in an attorney. There’s too much at stake to make a mistake.
There are numerous internet sources specifically on the subject of construction contracts, but it’s always beneficial to work with an accountant or lawyer experienced in this arena because if it’s not in the contract, it might not exist.
Statistics show that contractors have been riding drag for a long time when it comes to receiving the money they’re owed. That’s not right. Without them and their subs, the owner wouldn’t have a project from which he or she hopes to make a profit. The owner expects timely and full payment from whoever rents or buys from him.
The contractor deserves the same consideration.