Why Subcontractors Need to Talk About Slow Payments with General Contractors
Posted January 15th, 2020
Slow payments in construction impact everyone, but subcontractors get hit the hardest. After all, you’ve already financed the labor, materials and equipment to get the work started; a delayed payment means you can’t replenish your cash reserves and you may have trouble making payroll or other critical payments.
Most subcontractors make up the difference with personal savings or the wrong funding option for their business like a Merchant Cash Advance. Worst case scenario, work stops completely while you chase your money, enforce your lien, or borrow money from another project to manage the cash flow crunch on another which now puts both projects at risk. What do we mean by that statement? We mean something like choosing to NOT pay a material supplier once you are paid from Project X, with the plan to just do it next week when the check comes from Project Y.
It’s a nightmare, right? What if it didn’t have to be?
It doesn’t. Automation and technology are already starting to improve the payment infrastructure in the construction industry. But there’s something EASY and FREE you can do to start improving your cash flow right now.
You can have an open and honest conversation about money with your General Contractor. If you’re thinking, “Dream on. I’m not going to admit to my GC that I need money,” then this article was written just for you.
General Contractors, you should keep reading, too.
Come armed with empathy, not emotion.
Nobody is going to deny that slow payments in construction are the norm rather than the exception. PWC’s cash flow survey showed that contractors wait an average of 83 days to get paid! That applies to the owner delaying payment to the General Contractor, GCs delaying payments to subcontractors, and so on. When you talk to a General Contractor, start from a place of empathy for the GC’s position and then share your own.
“We both want to do the best work possible, and we both know the cash it will take to get that done. If the owner fails to pay on-time, it’s going to affect us both. Here’s how it will impact me. I don’t have the cash flow to cover three months of payroll, so I will probably have to dip into my personal savings or — God forbid — get a very high cost loan that will then debit my checking account every day putting tremendous pressure on my cash flow that is already an issue due to slow payments.”
It’s true. Find out more about Merchant Cash Advances here.
This may seem like admitting weakness, but it’s actually the opposite. Stating what is true and real, without emotion or fear, is exactly the kind of calm confidence people respect and look for in leadership. This is especially true when you are talking to someone in advance of a problem. You are not threatening or blaming, just informing them that if X happens then Y will be the result. We are partners in the outcome; how can we manage it together and what options are there to make sure this does not happen?
Support your stance with the facts.
The next step is to bolster your position with facts. Bring your numbers to the table. Show the GC your expected cash flow on the job, and your cash flow projection for the job’s lifetime.
All subcontractors and GCs should understand that on a construction project there is a certain point in the project when the job will cash flow itself. That time is NOT at the beginning of the project. Each new project requires an investment of cash to float payroll, material orders, and other job costs until you can invoice enough against the contract – this is true for the subcontractor and the GC. The point at which you are able to get enough profit out of the project to float payroll and other job costs is the point at which the job starts to cash flow itself.
If you need help determining the cash flow of your project, we created a guide you can use. Click here to get your sample Project Cash Flow Worksheet. (Don’t forget the instructions!)
It’s hard to deny numbers in black and white, and it’s helpful for General Contractors to see how a slow payment affects your entire company.
Once the General Contractor understands your perspective, it will be much easier for them to empathize. Now, take it to the next level.
Bring the GC a solution to the problem.
If there’s one thing a GC appreciates, it’s a subcontractor who PERFORMS without adding stress to the project. You can be that subcontractor. All you have to do is come to the table with a plan.
You’ve addressed the elephant in the room — slow payments on this job are going to be a nightmare for everyone. You’ve shown the numbers — here’s how it will affect me, my company, and my crew. Now it’s time to wipe the worry from your GC’s face. Give them your plan to succeed even if (when) a payment gets held up.
Share your funding plan for the first 90 days of the project. You have one, right? If not, click here to get started. Ask the GC if they’ve offered incentives to the owner for on-time payment. If so, you can double that savings by offering a discount to the GC if they can guarantee 30 days net payment. You’re in good company if you do — according to Rabbet’s 2019 Construction Payment Report, 72% of subcontractors said they’d do the same.
Bring it back to basic numbers — if we meet X pay schedule, the overall savings on the project will be Y%. That’s a powerful argument for the GC to make to the Owner or Developer, and you just hand-delivered it.
Flip the script on slow payments in construction.
General Contractors, are you still reading? Good. This part is especially important for you. We need to change the tone of conversation around payments in construction. ALL Subcontractors are NOT bad with money; they’re running a business with a payment environment unlike anything in any other industry. Subcontractors need you to be a partner in this, not an adversary.
Subcontractors, remember: You and the GC are on the same side. They hired you to do the great work you do every day. If you’re not getting paid on time, chances are it’s because the GC hasn’t been paid yet, either. Work together to come up with a plan that keeps both of you working and removes the stress from your cash flow.
It all starts with a simple conversation.
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