You’ve done everything right so far.
You won the hard-fought bid. You did the work efficiently and completed it on time—there’s even some profit in the job, you notice happily. You’ve billed the job accurately according to progress. Invoices were submitted on time. You have waited the allotted 30 days for the general contractor’s checks to arrive.
Only they don’t.
Perhaps it needn’t be mentioned, but just to be safe: In order to collect on your receivables, you need to know what they are, and at what rate they are aging.
When life and work turn hectic, you juggle many balls just to keep afloat, and the books sometimes take a backseat—and rightly so since they don’t produce income for you. But neglect bookkeeping for too long at your own peril.
There are many excellent software programs on the market to ease this task, and the prudent contractor has some tracking/accounting software up and running, keeps the data up-to-date, and generates and reads aging reports often—at least weekly.
When checks don’t arrive—or you suspect they might not—there are three legal tools at your disposal to help ensure payment for services rendered. The most commonly used is the mechanic’s lien, normally just referred to as a lien.
The payment bond is another legal document—between the owner and general—where the GC guarantees that he will pay his subs in full.
Personal guarantees are individual (as opposed to corporate) guarantees that stipulate that the GC owner will personally assume liability for any outstanding debt should his business fail.
Mechanic’s lien. A mechanic’s lien is a legal process that seeks to guarantee payment for contracted services rendered on an improved property. Normally, and depending on the laws of a particular state, both contractors and subcontractors can file a mechanic’s lien within a certain amount of time after the work has been completed and payment has not been received. Such a lien extends to both the structure and the land.
Once a mechanic’s lien is filed and registered, the owner no longer holds clear title to the property until the debt is paid, and that is always of concern. In other words, it gets the owner’s attention. The owner will then demand that the GC pay up in order to clear his title.
Originally, a mechanic’s lien was almost exclusively sought by an actual mechanic. If a mechanic fixed an owner’s car, and the owner then failed to pay the bill, the mechanic could place a lien on the car’s title.
This rather effective practice soon found its way into construction. The assumption for any project, of course, is that the owner will eventually pay the contractor, who will in turn pay his subs. However, construction projects are often started, some even finished, without such guarantees, giving the owner quite some leverage over the contractor since if the owner does not pay, it’s not as if the contractor can pick up the building and sell it elsewhere.
It is this inequality during the contracting and construction phase that makes a mechanic’s lien appealing to contractors. Instead of finishing a project and hoping the property owner is a scrupulous business person, the very threat of a mechanic’s lien can dislodge slow-to-appear payments.
To be sure, a mechanic’s lien is not a panacea for money woes, but it does afford some legal protection where not filing one, of course, offers none. Some view filing a mechanic’s lien as a last resort, fearing that such filings might threaten working relationships. But if your survival is at stake, getting paid now would certainly be the senior consideration.
Payment bond. Surety bonds establish a legal relationship among the principal (the contractor), the obligee (usually the owner) and the surety company. While not an insurance policy, the surety bond is a guarantee where the surety company guarantees that the contractor, named the “principal” in the bond, will perform the “obligation” stated.
The “obligation” stated in a bid bond is that the principal will honor its bid; the “obligation” in a performance bond is that the principal will complete the project; and the “obligation” in a payment bond is that the principal will properly pay all subcontractors and suppliers.
Should the principal (GC) fail to perform the obligation stated in the bond, both the principal and the surety are liable. That means that either the principal or surety, or both, may be sued on the bond, and that the entire liability may be collected from either the principal or the surety company.
The payment bond—signed by the GC—guarantees the owner (and by extension, the subs) that subcontractors and suppliers will be paid the monies that they are due from the principal. The beneficiaries of such a bond are the subcontractors and suppliers.
If the principal fails to pay the subcontractors or suppliers, they may collect from the principal or surety under the payment bond.
Maneuvering a payment bond into place—especially in this market—is not a given, but you could, as part of your bid response, suggest contract language that requires that the GC to execute a payment bond with a surety company and so give you a second source for payment should the GC fail to pay his bills.
Personal guarantee. A personal guarantee is a legal document where the owner of a company assumes personal liability for any debt incurred in a business transaction such as a construction project.
Should the owner of the GC company execute a personal guarantee, it means you have a second source of payment should the business fail to pay due to bankruptcy or for other reasons.
Again, maneuvering such a guarantee into place is not necessarily easy. You can request it in your bid response, but the GC is as likely as not to simply ignore your bid and go elsewhere to someone who does not require such a guarantee.
Legal tools aside, how does being paid these days work in the trenches? A brief survey of members of the Association of the Wall and Ceiling industry highlights some common approaches.
Screening. “I keep a very close eye on the A/R aging reports these days to see what’s out there,” says Glenn Sieber, co-owner of Easley & Rivers, Inc. in Pennsylvania, “but our main tactic is to avoid the problem of non-payment in the first place by dealing only with reputable firms that we’ve had dealings with in the past. Where that is not possible, we try to establish up-front, as well as we can, that a new general can, in fact, pay his bills.”
This is a sentiment echoed across the country.
“These days I have to be a lot more careful,” says David Hamilton, president of A.E. Conrad Company, Inc. in Minnesota. “I have to be a lot more aware of whom I am working for. This is not an issue with our long-term clients, but with out-of-town generals. We check them out very closely, including Dun & Bradstreet, and do anything else we can to assure their credit standing and ability to pay their bills.”
“These days we are being very selective about who we work for,” offers Lee Zaretzky, president of Ronsco, Inc. in New York City. “We study the lien lists to make sure we’re staying away from situations that threaten to go south.”
Sieber says, “You need to keep an eye on the various publications that show the relative financial strength of people, such as those who list state or federal liens. If the owner shows up there, you know you may have problem.”
The bottom line here is to know before you go. If the general is new in the area, or someone you have no relationship with, take the time to ascertain his credit, ability to pay his bills and payment history by checking with other subs.
Progress payments. Partial payments as you complete pre-defined sections of the job should be routine, but in these times it will pay to emphasize and insist on a payment schedule in the contract document, which you would then demand the general abide by.
“We are firmer these days about the progress payment language in the contract,” says Stephen Donnelly, president of Stephen P. Donnelly Company, Inc. in Minnesota. “And we’re also more firm about the invoices. We make sure they go out on time, and we verify that they are received. Then we call and check when we can expect payment, making sure they don’t forget us.”
Liens.“We’ve had a few jobs where we’ve had to file liens to get paid,” Hamilton says. “This is something that does work and does protect you, especially if it’s an owner of any size. You do get their attention, and you usually do get paid.”
“Keep in mind, though,” he continues. “With a lien it depends on where you are in line. If the owner doesn’t pay his bills, he’s usually in trouble with the IRS as well, and the IRS is always first in line in any lien situation. Next, as a rule, are the banks—almost always. So, it depends on where you are in line.”
Donnelly says, “We’re filing more pre-liens and liens these days. And this is working for us, we are collecting. Our A/R is in better shape now than it’s been for a while.”
“We file liens every now and then,” Zaretzky says, “but for the most part our work is relationship based, and we don’t want to jeopardize that. That said, every now and then the owner is not paying the general, and we then gladly take on the role of the bad guy who files the lien on the property to force the owner to pay up. This serves two good ends: It cements our relationship with the general since we’re helping him out, and we do see the money.”
For Tom Russo, CEO of Division Nine Contracting, Inc. in Phoenix, liens are, by state law, a way of life. “In Arizona,” he says, “you have to file a pre-lien notice at project start in order to reserve the right to file a lien after the project, so we do that with virtually every job. We then have a fair amount of time after completion to file a lien if we do not get paid—that does get the owner’s attention.”
Discounts. One way to prompt fast, or even early, payments is to offer discounts to those generals who pay within a certain amount of time.
Says a large California contractor’s operations manager who wishes to remain anonymous, “Collections are a struggle these days. In our experience, few contractors commence payment in less than 90 days. Therefore, we offer savings for clients that pay us quickly and consistently.”
Relationships. Whenever possible, to ensure payment, our contractors seek to work with generals they have a positive track record with.
“For us, without a doubt,” says Sieber, “our most successful action is to deal with people we’ve worked with in the past, where I can pick up the phone at any given time. I have to be able to call someone and ask how things are going. There has to be a channel for personal communications.”
Brentt Tumey, director of operations for Managed Subcontractors International, Inc. in Arkansas, agrees that a “sound relationship with our customers is the key.”
The Ally. The ally is a person working for the general with whom you have a great relationship, and who will do what he or she can to help you. That person is worth their proverbial weight in gold.
“What works for us,” says the California operations manager, “is to ensure that we have an ally on each project, someone with the general who will push our billing through or let us know if there’s a problem.
“Also,” he adds as a suggestion, “keep the bills well documented and accurate to make sure the general cannot question them. These days, any questionable bills are likely to result in a rejection and zero payment, rather than partial payment.”
Communication. What all contractors seem to agree on is that collecting outstanding receivables these days requires more communication—in many cases a lot more, and person-to-person.
Hamilton says, “I have found that speaking to them is the best way to get paid. Find a person—in accounts payable—and ask what is going on.
“People, as a rule, are not corrupt, they do want to pay you if they can, or they’ll try to work out a deal with you. You have to be a squeaky wheel, but a nice one.”
Donnelly agrees: “I would say that communication is the best tool. That is what has worked the best for us.
“And,” he adds, “if you don’t get paid by the general, don’t hesitate to call the owner. That, in my experience, has triggered a lot of action, and is actually our number one successful action in collecting.
“You have to be very professional about it, though. We’d call the owner and ask if there was any problem with our work, and when they say ‘No, why do you ask?,’ we let them know that we were not paid for what we did. That seems to work wonders.”
Zaretzky believes in communications as well. He says, “The key for us in collecting is increased communication with our customers, and by that removing any excuse they have for not paying us, such as forgetting, or losing the invoice. It’s more communication. That is what it takes.”
Daniel Corker Jr., president of DACO Interiors, Inc. in Virginia, could not agree more: “It definitely takes many more phone calls these days—a lot more communication. First we make sure they received the bill as soon as we have sent it. Then, if we have not been paid, we call back in 30 days to see when we can expect payment. We call them at least weekly after that.
“We are getting paid, but cash flow is at a premium these days for everyone, so our GCs are a lot slower than they used to be. So we keep calling.”
Russo is keeping in touch to get paid as well. He says, “These days, we have to chase the money a lot harder. Receivables are running into 45 and 60 days. It takes a lot more communication, which so far—knock on wood—has worked well for us. We do get our money, eventually, but we have to stay on them.”
Today, cash flow is at a premium. The owner will hold onto his money as long as he can before passing it onto the general, who then follows suite and delays as long as possible passing the cash on to the sub. As the economic downturn lingers, this situation will most likely not ease up any time soon.
To ride this storm out:
• If at all possible, work with GCs you have a long-term positive relationship with.
• Get government work if you can. They are automatically bonded, including GC payment bond.
• Screen the unfamiliar GC as well as you can, including checking with other subs about the GC’s payment practices.
• Work firm progress payments into the contract, and insist on them being made.
• Attempt to work a payment bond into the contract.
• File liens at the first hint of non-payment.
• Keep on top of your receivables at all times.
Coeur d’Alene, Idaho–based Ulf Wolf writes for the construction industry as Words & Images.