Agreeing to payment terms and then achieving those terms can be a challenge—particularly in the construction industry, where there are tiers of buyers and sellers. Sometimes general contractors will use joint check agreements to issue payments simultaneously to a subcontractor and its supplier. These agreements clarify the rights of each party regarding the endorsement, issuance and effect of the joint check payments.
Contractual agreements such as these are agreed upon by all parties and state that payment made by the general contractor to the subcontractor for the cost of the materials supplied will be sent to the supplier.
The topic of joint check agreements surfaced during a recent discussion among members of NACM's thought leadership construction group. The discussion emphasized the importance of scrutinizing the language within the agreement before signing on the dotted line.
"A joint check protects the supplier from the risk of the subcontractor getting paid from the general contractor and then using those funds for something other than paying the supplier its portion," said Sam Smith, regional finance manager of Crescent Electric Supply Company (East Dubuque, IL).
Joint checks can be useful in any industry or market—regardless of a customer's financial standing—but they are more commonly used in the construction industry. These agreements can protect suppliers, and they can also "protect general contractors from having a mechanic's lien or bond claim filed due to nonpayment," Smith said.
Chris Ring, of NACM Secured Transaction Services, cautions, however, that joint check agreements do not guarantee that someone will actually write the check. "Therefore, you should never accept a joint check agreement in lieu of maintaining and enforcing your lien rights."
According to Smith, suppliers can benefit in a number of ways when signing a joint check agreement such as:
Unfortunately for suppliers, some subcontractors try to use the funds that are intended for the supplier to make payments elsewhere such as payroll, to other suppliers or for other work-related activities.
"Years ago, a customer of mine admitted to taking funds intended for me and using them for his employee Christmas party," Smith said.
And, payment funds do not always flow easily. Suppliers can still be affected by any delays that may occur. For example, if there is a dispute between the general contractor and the subcontractor, the general contractor may withhold payment "until the subcontractor resolves the issue, thus preventing the supplier from being paid even though the dispute has nothing to do with them," Smith said.
Although credit departments can develop their own joint check agreements, Smith cautions that some general contractors may want to use their forms because they were approved by their legal team.
If that is the case, "we have to review the general's form and determine if we can work with it," Smith said. "There is no standard joint check agreement, and they all can be very different."
Suppliers that ask their customers for a joint check agreement might be met with resistance. Some customers could consider the idea of a joint check agreement as an insult, Smith said. Or, "They don't want the general contractor aware of any potential financial issues they may have and how it could impact their job.
"My experience has been that many generals prefer joint checks so they don't have to worry about issues of nonpayment and lien or bond claims," Smith said.
When reviewing a joint check agreement, Smith recommends addressing these key points:
The key is to understand what you're signing, Smith said.