From GCs to Material Suppliers: Avoiding Slow Payments

Experience in the construction industry can tell you a lot about what makes a good general contractor (GC). Qualities such as industry knowledge, project and time management, and delegation skills certainly boost a GC's resume, but a professional of such high caliber can have their reputation tarnished with two words: slow payment.

There is a laundry list of reasons why GCs don't pay their subcontractors (subs). Fortunately, subs working with slow payers have many tools at their disposal, which if properly executed, can help speed up the process to ensure material suppliers see payment as well.

Stand Up for Contract Terms

Sometimes, subs and material suppliers must navigate a "pay-when-paid" or "pay-if-paid" clause in a construction contract, both of which GCs may use as a means to delay payment, one Virginia attorney told NACM. Most of the relationships between owners and GCs fall under one of these two clauses, and in some cases, the GC is under no obligation to pay the sub unless or until they've been paid by the owner. However, whether the clause is enforceable varies from state to state.

"Then, when the GC pays the sub, a material supplier may say, 'I don't have a pay-if-paid clause in my paperwork; I'm just supposed to be paid 30 days on invoice,'" the attorney said. "But that isn't the way it works. If anything, the sub doesn't have the money to pay the material supplier unless or until they've been paid by the GC."

Construction attorney Quinn Murphy told Construction Dive that before signing a contract, subs have the opportunity to negotiate payment timeframes—perhaps removing pay-when-paid or pay-if-paid clauses—as well as retention terms with the GC. Although it is industry standard that may allow up to 10% of a sub's invoice amount to be withheld, Murphy explained, retainage is in place to make sure subs are doing their part. So, if they are, there isn't as much of a need to withhold retainage.

"There's no reason why the general contractor shouldn't be required to pay you when you hit certain milestones like substantial completion," Murphy said.

A Mechanic's Lien Is a Friend

A mechanic's lien provides a form of security for the payment of money owed to persons such as contractors, subs, workers and material suppliers who add value to a building that is under construction. Furthermore, the process prompts payment of creditors throughout the project and ensures that money intended to finance the construction is, in fact, used for that purpose.

Once again, lien laws vary around the country, Construction Dive states, but a mechanic's lien often informs property owners of delayed payments, in turn, putting pressure on GCs to pay subs. In the article, Rutan & Tucker attorney Justine Kastan said a mechanic's lien "gives [subs] a pretty tangible form of security for your claim."

Nowadays, vendors on construction projects can usually go on a GC's website, where all sorts of information is available. Material suppliers have to develop the skills to look at the contract and find the parts that concern what they're supplying.

NACM's Lien Navigator is a powerful tool available for credit professionals, where they can learn more about state statutes.

—Andrew Michaels, editorial associate

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Tuesday, 05 March 2024

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