Webinar Recap: How to Get Paid & What to Do When You Don’t
Posted June 29th, 2021
Cash is the lifeblood of your contractor business but getting that cash can be a nightmare. We asked Lori J Drake, CBA, Levelset‘s Payment Professional’s Community Manager, to join MF CEO Scott Peper for a conversation about the most common reasons payments get delayed, what to do if a GC payment is late, and how to keep your cash coming in on-time.
Why does it take so long for subcontractors to get paid?
The best place to start is to understand that payments in construction operate on a waterfall model. Subcontractors are at the end of that stream of cash, and so their wait is longer. It typically starts with a bank or financial institution, the one financing the owner or developer.
Are there “bad” general contractors out there? Sure. Bad owners, bad projects. But the majority of the problem stems from the macro factors around construction cash flow — things you cannot change. The owner or developer has already put in a lot of work before the project is off the ground. They typically have put a lot of their own cash in long before they secured funding from the bank or a government fund.
The GCs are in a similar boat — they have a lot to do and manage before the work starts. And of course, the subcontractor does the work, has it checked two or three times before it is approved and submitting it for payment.
Then, if you submit your pay app correctly, you wait 30-80 days for payment.
And that is another reason payments are slow in construction — a complex and laborious pay application system. Many GCs only pay once a month, and if your pay app misses the deadline or has errors, you have to wait another month before you get paid.
Lori recommends making sure everyone on the job knows you exist right from the start. “Send a preliminary notice on any job that you do. … anyone that you want to make sure that your risk is minimized. If you don’t send a preliminary notice the owner of the property, other subs, GCs — anyone in that payment waterfall — if they don’t know you exist, they can’t make sure that you get payments. So that I would say is the number one step.”
Nervous to file a preliminary notice? Don’t be. Preliminary notices aren’t a threat; they aren’t hassling your GC. They are your normal operations, your due diligence to protect your company so you can focus on PERFORMANCE. “When you do great work, you expect to be paid,” says Scott. “To keep honest people honest, we put locks on doors. To keep money flowing when it’s supposed to you let people know you’re there.”
How can subcontractors ensure faster payments?
The first step in ensuring faster payments happens before you ever put boots on the site. Check the credit worthiness of your general contractor. Levelset has a Contractor Profile tool that shows how many jobs a contractor has performed annually, how they performed, the types of jobs, and feedback from the people who have worked with them. “It gives you a whole bunch of information that you really can’t find anywhere else,” says Lori. “It’s kind of like a trade reference on the GC but with a lot more information.”
If you are working on a government project, you can relax a bit. There’s usually a payment bond in place.
Document everything. Follow the spirit and the letter of your contract. Ask your General Contractor any questions you have about documentation, change orders, pay apps — literally anything you are unsure of. Scott puts it like this, “I had a boss that used to tell me, ‘You know, Scott, I can protect you from anything, you just have to make yourself bulletproof. If you’re in the construction world, and you have a contract that says you need to do something specific each day or each week, then do it. Keep yourself bulletproof.”
Submitting the preliminary notice also helps speed up payment. It lets everyone on the job know that you exist and that you are doing your due diligence to get paid. You can also send conditional waivers with each invoice or pay application. The GC has to sign it, acknowledging what you are billing them for, and agreeing to contact you if there are any issues.
Submit demands for payments promptly. If you have 20-day terms with your GC, then remind them you are still waiting for payment on day 21. Don’t worry about appearing annoying (unless your approach is to be annoying, in which case slow payments are not your biggest problem.) “The ones that ask questions are the ones that get paid faster,” says Lori. “If you’re not asking, they’re not worried about it.”
Finally, you can speed up payments with technology. Accepting online payments and credit card payments eliminates the wait for paper checks to make it through the mail. It also removes the chance that your check gets lost in the mail. When you get paid online, you get your money immediately. “Most GCs love to pay with a credit card,” says Lori. “They get rewards off it and get another 30 days to pay their credit card. If you can find a way to do that, it’s definitely going to be in your favor.”
What to do when a payment is late?
A popular, if drastic, option is a mechanic’s lien. It’s important to know the laws in your state — when you have to send a preliminary, when you send a first or second, when you file a lien, when you have to foreclose on a lien, etc. This course of action can lead to negative repercussions, but it is a way to get recourse and get your money back.
Get everything in writing. If your contract says that the GC is supposed to pay in 30 days and it’s day 33, that’s a breach of contract. If the GC doesn’t do what they are supposed to do, even in the smallest detail, it is a breach on contract. Lori says, “If you had any inclination that this person isn’t going to pay you even prior to sending notices, you can file suit on that and then continue to send notices. It’s a very strong law that does get played out a lot.”
Scott adds that working with a construction lawyer can help avoid payment issues and get you paid when an issue arises. Because contract laws, and contract language, can be hard to interpret and different laws and policies can help or hurt you.
For example, if you have a Paid When Paid clause that you’ve agreed to, it may impact your ability to utilize a prompt payment law. A contract lawyer can help you remove some of the ambiguity. Scott says,
“One hour of an attorney’s time to review your contract can pick the four or five or six main clauses that can keep you from a real disaster.”
Simple things like good documentation and good communication with the GC upfront can make a real difference, adds Lori. “Stay on top of your deadlines. Make sure you keep in contact with people. Stay aware of what’s going on with each project and everybody that’s on it. It’ll make a big difference.”