Like any industry that relies heavily on extending credit to get business done, construction can be risky. Unless you’re in the 0.0001% of subcontractors who get paid up front and in full, you’re providing a line of credit to the general contractor that you’re working for. Before you even bid on a project, it’s important to ensure that the GC has a track record of paying their bills on time. Assessing payment practices is an important part of the contractor prequalifying process before you start a job. You can check the commercial credit score of GCs who have one. If they don’t have a credit score, we’ll look at some other indicators of creditworthiness that are just as important.
No one starts a new construction project expecting to get stiffed on their payment when it’s done. But unless you do your research before bidding on a job, you are leaving yourself open to significant risk and potential for payment disputes. You want to make sure that the GC pays you on time for the work that you do. Unfortunately, many contractors just take a wait-and-hope approach.
When a business has good credit, that typically means they pay their bills on time. It’s a signal that they value their relationships with clients. A business with bad credit may be dealing with cash flow problems – or they might just . If you check a GC’s credit and see that they’re not paying other bills on time, are you confident that they will pay yours?
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Checking a GC’s credit
Checking the credit of a general contractor is a bit different than checking your own credit score. While there are credit bureaus that collect and monitor information on a company’s credit, they are voluntary services. A business has to ask the bureau to start building a credit history for them.
However, if a company doesn’t have a credit report, there are other indicators you can look at to determine their creditworthiness.
Buy a credit report
One way to assess the creditworthiness of a GC is to buy a credit report from a credit bureau. These reports are easily accessible, cost-effective, and give subs a chance to see an objective assessment of the company’s financial track record.
Three of the largest providers of commercial credit reports are Dun and Bradstreet, Experian Commercial and Cortera. These credit reports can vary in detail and in length. A credit report on a GC will tell you if they have a history of paying their bills on time, or if they are slow payers. You’ll be able to gather information that tells you if a general contractor has a positive or negative payment trend. A credit report can tell you if the GC has any active negative filings, such as mechanics liens. A credit report also determines how big the client’s vendor credit lines are.
Credit scores will tell you if a GC is currently facing some financial distress. Most credit reports will qualify a positive or negative payment trend with a score. So, check to see if the contractor is taking longer to pay their subs now compared to the past.
However, not all GCs will have a report available with a credit bureau. Most small or mid-size contractors won’t actually have any business credit at all. Until a company reaches a certain size, and can prove their financial stability with proper accounting reports, their borrowing ability is tied to the owner’s personal credit.
If a contractor doesn’t have a credit report available, don’t give up just yet. There are other indicators that you can look at to assess a contractor’s ability to pay – and their willingness to pay their subcontractors and suppliers on time.
Look at the GC’s payment history
Before you bid on a project, look up the GC on Levelset’s Contractor Profiles. The free service allows you to search the payment history of a potential contractor, along with anonymous client reviews of their payment practices.
A company’s Contractor Profile provides an overview of their payment history, along with a unique payment score: Fast Payment Speed, Medium Payment Speed, or Slow Payment Speed.
The contractor’s payment score takes into account all construction document records in Levelset’s database of 3 million active projects, where more than 750k payment documents have been exchanged. A contractor’s score is based on both the number of disputes or warnings that a contractor has received, and how recently they occurred.
Ask for proof of creditworthiness
General contractors often require subcontractors to get prequalified for a job before they will consider bids or proposals. The GC will require various types of information from a sub, such as litigation history, finances, safety record, relevant work history and experience, insurance coverage, and more.
The GC also has to submit these details to the project owner as part of their prequalification process to manage the project. In addition, the GC will likely have access to financial documents for the property owners and the project itself. Subcontractors and suppliers should make requesting information part of their project bidding process, or before they sign a contract. Don’t just assume that a project owner has done their due diligence in qualifying the GC. If a GC isn’t willing to share information about their creditworthiness or payment history, that could be a sign that they have something to hide.
Check the GC’s license
A local builders’ association can provide information regarding licensing the contractor must hold for the specific project. While state licensing requirements vary, they will typically require proof of insurance, along with work experience, references, and financial stability.
Contact recent subcontractors
Another helpful tip is to ask the general contractor to provide you with a list of subcontractors they have recently worked with, along with their contact information.
Ask the subcontractors directly about the GC’s payment practices. How long did it take them to get paid? Did they receive their retainage on time? Did they or anyone else on the job ever initiate a payment dispute?
Beyond the GC’s credit: Look at the project itself
While it’s valuable to check the GC’s credit, it doesn’t provide a guarantee of payment on the job. Often, looking at the project funding itself will give you a better idea of the job’s financial viability or risk for non-payment. After all, payments start from the owner, lender, or investors. If they don’t have enough money to complete the project, everyone’s payment may be at risk, including the GC’s.
Subs should feel comfortable asking the GC for information about the project’s financing. The GC likely requested the same information from the owner or lender before they accepted the project, too.
No matter what: Protect your payment
Even if a GC has poor credit, or a risky payment history, you may still decide that the project is worth it. In that case, don’t be afraid to negotiate payment terms in the construction contract that you can stomach. If the GC has a history of slow payments, you might want to require a contract provision that assesses penalties for late payments, or provides some extra motivation for on-time payments in other ways.
Assessing the creditworthiness of a GC is a smart step in your preliminary research before you submit a proposal or sign a contract. But even if the GC or property owner has perfect credit, that doesn’t guarantee your payment. It’s still important to protect your right to file a mechanics lien or bond claim. Know your state law, and when deadlines are due. Send preliminary notices on every job (whether you’re required to or not).