In some ways, subcontractors have it rough. Because the general contractor or another sub hires them, they’re rarely a thought in the project owner’s mind. Many of them have indispensable skills, yet rarely get much credit for their work. When it comes to subcontractor payments, they’re often in the dark, waiting in line, or fighting for their cash.
It doesn’t matter if a subcontractor is a one-person show or a large outfit with lots of employees; if they improve real property, they have a right to get paid. When subcontractors don’t get paid, their company struggles, but problems can also ripple up and down the project chain. The subs’ subs can starve for payment. Disgruntled, unpaid subs file can file liens, and owners can find themselves in bad positions — even if they already paid the general contractor.
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The subcontractor payment dilemma
The design of the construction payment chain puts subcontractors in one of the last positions to get paid. Money has to flow through several locks along the way before it makes its way to the subcontractor. That takes time, and it’s actually quite complicated.
Subcontractors are fighting low visibility
Generally speaking, prime or general contractors hire subcontractors for their projects, and those subs often hire their own subs. Those subs and sub-subs often have suppliers as well. That’s a lot of links in the payment chain. Making sure every one of those parties receives payment is a challenge.
It’s even harder if the paying party doesn’t know they exist.
Many times, the owner or the general contractor doesn’t even know those parties are working on the project. How can they ensure that the sub-sub’s materials supplier receives payment if they don’t even know they’re there?
When it comes to owners, they rarely know of anyone past the general contractor. They expect to pay the general contractor, and they rely on that person to distribute payments correctly.
There’s just not a lot of visibility along the payment chain.
The payment application process is long and delicate
Checks don’t just roll out bi-weekly on a construction project. In most cases, subs need to supply payment applications within specific windows in order to get paid for their work. These dates are often on a monthly basis.
The subcontractors have to submit their payment applications to the general contractor, and the general contractor will then present them to the owner or a representative of the owner. This person then reviews them to ensure they’re correct, they aren’t paying twice for the same work, and everything is on track.
Once there’s a thorough review and the apps receive approval, the owner or bank cuts a check to the general contractor. The general contractor then cashes the check and, in theory, pays the subs.
Any hiccup along the way in that process can lead to delays in the application process.
General contractors don’t love cutting checks
Construction is a cash-hungry industry, and general contractors have the same struggles as everyone else. Occasionally, a general contractor will hold onto the payment money to shore up their bottom line or collect a bit of interest. It happens more than most GCs would like to admit.
When a general contractor holds up the cash flow, no one gets paid. The subcontractors don’t get paid, so they can’t pay their subs or suppliers.
To help avoid this, many states have prompt payment laws that dictate how long after payments a general contractor has to pay subs once the GC receives payment. Federal jobs also receive a bit of protection from this practice.
Collecting lien waivers can take a lot of time
Lien waivers can be an incredible tool. They make sure everyone gets what they want out of a project. But they’re also a hassle. Owners sometimes task general contractors with collecting lien waivers from all the subs on the project.
Collecting all of these documents takes time. The GC has to track down everyone on the project to get them to sign a document that states they agree to waive their rights to a lien in exchange for payment. You can imagine folks aren’t lining up to scratch their name on that doc. They could be driving from site to site to get these signatures. All the while, the rest of the payment chain awaits payday.
What subcontractors can do to get paid
Getting paid at all, let alone on time, can be a challenge. Luckily, there are a few things that subcontractors can do to avoid payment issues, delays, and disputes.
Send preliminary notices
Expecting to get paid on time when the owner and GC don’t even know you’re on the job is a little silly. It’s worth stressing that a preliminary notice can put you and your company on center stage.
Sending a preliminary notice covers a few bases. It lets the general contractor and owner know you’re working on the project, so it serves as a professional introduction. It also tells both of those parties you know your rights to payment, and you’re willing to file a lien if they don’t play by the rules. In fact, preliminary notices are a requirement if you want to protect your lien rights in some states.
Not sending a preliminary notice can put your payments at risk.
Submit pay apps on time
It should go without saying that if you expect timely payments, you should send timely pay applications. No one wants to track you down to give you money, so don’t expect anyone to look for your pay application. Be sure to submit complete, accurate payment applications to help reduce the risk of delays or issues.
File a mechanics lien or bond claim
The best way for subcontractors to light a fire under an owner or general contractor is by filing a mechanics lien. Filing a lien against the property will make it less liquid and can be detrimental to future attempts at secure financing.
On bonded projects, filing a claim against the payment bond could also speed things up. The main difference between a payment bond claim and a mechanics lien is that mechanics liens attach to the property, while bond claims attach to the bond. If you aren’t getting paid, you can make your payment issue an issue for the surety.
Use conditional waivers
Remember the exhausting lien waiver process mentioned earlier? The best way to avoid issues with it is to tackle it head-on. Sending a signed conditional lien waiver with your payment application can speed things up tremendously.
Conditional lien waivers state that you’ll give up your lien right if, and only if, you receive payment. As long as you’re careful when you draw up your conditional waiver, you’ll only be waiving rights to a lien in the amount of the payment application. So you can send a conditional lien waiver with your app that will speed up the process but still retain your rights to a lien on the rest of the project. In most cases, the owner will be happy to cut that check.
How property owners can optimize subcontractor payments
Subs aren’t the only ones affected by subcontractor payment problems: Property owners shoulder a lot of the risk as well. They need to ensure that subs and suppliers down the line are getting paid. Here are some tips that will help.
Get a list of everyone on the job
Property owners have the right to know who’s working on their projects. Request that your general contractor gets a list of all the subs, sub-subs, and suppliers working on the project. Sending Requests for Information (RFI) to all the subs that you’re aware of will help.
Make preliminary notices a requirement on your project
It might seem counterintuitive to request a document that potentially protects the contractors’ lien rights, but the good it serves the project owner far outweighs the risk. Making preliminary notices a requirement will almost ensure that you’re aware of everyone working on the project.
Use, request, and track conditional lien waivers
Conditional lien waivers serve property owners just as much as they serve subcontractors. They’re one of the most effective tools for ensuring the owner gets a project free from liens and payment disputes.
You probably remember from a few paragraphs ago that lien waivers can be a pain to track. Construction-centric software programs can help keep things straight. Many of these programs are for professional developers, but they can cut electronic payments and lien waivers at the same time. For homeowners, an app like Pulled, Inc. can track subs and payments, and provide a reference to help you determine who signed their waiver and who you need to track down.
Make payments on time
By and large, the best step property owners can take toward keeping your subcontractors happy is making payments on time.
Yes, the cash still has to flow through the entire chain. But, project owners can’t expect the general contractor or upper-tier subs to make their payments on time if the initial payment wasn’t made on schedule.
Use joint checks
In some cases, it might pay to cut individual joint checks. Cutting checks made out to the general contractor and some upper-tier subcontractors ensures that payments can at least flow past the GC.
Subcontractors deserve to get paid
When a sub improves a real property, they deserve to get paid. If you’re a subcontractor stuck in a payment dispute or just struggling to get paid, it’s important to know that payment help is here. State and federal laws are in place to protect you, but you need to know how they work and how to leverage them for your business.