There are a lot of situations in life where the writing’s on the wall. All of the signs are there, or something just doesn’t feel right, but we proceed anyway, only to end up burned in the end. Working with general contractors isn’t any different. But, there are sure signs you can look for to spot a contractor that won’t pay their subcontractors.
Many seasoned subs can smell a dishonest or struggling general contractor from a mile away. But that ability comes from years of experience — and being burned a time or two before. If you’re looking for the telltale signs that a contractor might not pay you, this guide will help. It’ll help you recognize red flags and warning signs so you can avoid painful, costly mistakes.
7 signs a contractor won’t pay their subcontractors
Here are the 7 signs that a contractor might not pay their subs. Keep an eye out for any of these signs the next time you’re considering working with a new contractor.
1. The contractor has a bad reputation
The construction industry is a small world, and there’s rarely more than a degree or two of separation between contractors in a given region. If you’re considering taking on a project with a new general contractor, ask around to see what other subs have to say about them.
You’ll either hear things like “he’s a great guy,” or “you’ll love working with him” — or the sub will tear down their name. It’s important to understand that personalities clash, so try to focus on the sub’s payment experience with the general contractor, rather than just personal grievances. The dispute they had when the sub backed into the GC’s truck is irrelevant.
2. They speak down to you
Confidence in their business is one thing. Belittling you is another. A contractor that continually reminds you how lucky you are to be working on his project clearly doesn’t appreciate you. It’s a tactic that some personality types use to shake your confidence and push you to do more for less.
You’re a professional, and any relationship you enter into should be mutually beneficial. You have something to offer the project. If the general contractor is trying to strongarm you or put you down, it’s a sure sign you won’t be first on their list when it comes time to cut the checks.
3. They aren’t upfront with information
Regardless of the project’s size, communication in construction is the most critical aspect for taking an idea and turning it into a finished product the owner will love. If your prospective general contractor doesn’t like to communicate clearly, it could be a huge red flag.
There are a number of ways your general contractor’s communication could cause issues. For one, if they aren’t clear with the owner’s expectations, you can find yourself in a whirlwind of disputes or unforeseen change orders that will slow your payments down.
Also, if they aren’t upfront with the owner’s name and contact information — or the bank financing the project — there could be a reason (keep reading to find out what that reason might be).
4. Their business has changed names (or hands) frequently
A construction company’s reputation is everything. Once they botch their good name, it’s tough to rebuild it.
But, it’s not hard to dump it all together and start over with a new name or with new “ownership.” A fresh start allows them to leave their financial baggage behind. It’s a tactic used by companies across every industry.
Look at the folks behind the company. Have they shut the doors on several other construction companies before? Does the business keep changing hands between family members? Do they own several companies that all appear to do the same thing? Ask yourself why. That might be a sign.
5. They’re involved in too many projects
Ask your prospective contractor how many projects they’re on. You’ll have to follow your gut to determine what you feel is “too many,” but a contractor running several projects at once can overextend themselves in a hurry. Keeping each project’s finances separate is the mark of a good contractor, but it’s often a tricky balancing act. An unbalanced backlog of projects — even when it’s full — can actually be detrimental.
The truth is that contractors often shuffle money from one project to the next. They might be floating a progress payment from one project to finance another. They might be using a deposit to make payroll on an unrelated job.
Ideally, you want the funds your paycheck comes from to be as liquid as possible, not tied up on another site.
6. The contractor has a history of mechanics liens and disputes
Do a little research to find out what the prospective contractor’s payment history looks like. If they have a history of mechanics liens, payment disputes, or paying slowly, that’s a sure sign there’s trouble in store for you come payday.
If you need help digging into their pay-related past, Levelset’s Payment Profiles can help. This database of construction companies will point out any past mechanics liens or disputes reported by subcontractors. It also assigns them a payment score to help you determine how long you could be waiting for your money.
7. They’ve experienced a past bankruptcy
Sometimes, bankruptcies are actually for the best. Companies often emerge stronger and wiser, and they’re able to make the most of a fresh start. But bankruptcy can also be a red flag. It can be a sign of poor business performance or money management.
The contractor’s personal financial history matters as well. If they’ve been through a recent bankruptcy, it can be a sign they have a habit of stretching themselves too thin.
What you can do to protect yourself from contractors that won’t pay
Fortunately, there are a few things that you can do to protect yourself from a non-paying contractor taking advantage of you.
Prequalify your potential contractors
Vetting your contractor before you sign a contract is a crucial step to avoiding an expensive headache. Check their payment history through Levelset’s Payment Profiles, ask around about their payment practices, and consider their credit history.
Protect your payments
Sending a preliminary notice in states that require them is key to protecting yourself — and your payments — from a predatory general contractor. This document serves as an introduction and preserves your mechanics lien rights.
If you remember, one of the red flags mentioned above was when a contractor isn’t forthright with the customer’s information, and I said there could be a reason. Savvy general contractors know that a lot rides on a preliminary notice. If they can drag out the important information, they can get you to work unprotected until you get the names, addresses, and other you need.
Send payment reminders and notices of intent
Even if your contractor’s background checks out, they might still be slow to make payments. Sending a friendly payment reminder can help bring your invoice to the top of the pile and possibly speed up the process.
But, if that doesn’t work, you might have to flex your muscles a bit. Sending a Notice of Intent to lien (NOI) tells the contractor that you’re ready to file a lien if they don’t pony up. Since you protected your payments with a preliminary notice, your NOI will carry some weight.
File a mechanics lien
Sometimes, contractors force your hand. Whether they’re playing a ball-and-cup game with your cash, or they simply don’t have the money to pay you, you might have to take your rights a step further by filing a mechanics lien.
Mechanics liens are the best tools subcontractors have to speed up their payments. Once you file a lien against a property, the property becomes less liquid and further financing becomes challenging. It can be just the ticket to force a conversation between you, the owner, and the contractor that hasn’t been holding up their end of the bargain.