We’ve written extensively on the problem of slow payments in the construction industry. And our attention on this subject is, unfortunately, quite justified, since it takes longer to get paid in construction than just about any other industry.
If you’re a subcontractor that’s getting slow-paid on a project, it’s easy to blame the general contractor for the hold up. After all, they hired you on the project, they’re the ones that you have a direct relationship with, and of course, they’re the ones that actually make the payment to you, late or not.
But what if the general contractor is not to blame in a slow payment situation? What if they’re the ones being slow-paid by the project owner? If the general contractor needs to receive payment from the top in order to be able to pay all of the subs on the project, can you really blame them for your payment delay?
And an even better question might be: if slow payment on a project is a direct result of slow payments from the project owner at the very top, can the other companies on the project do anything to speed up the owner’s payments?
Sometimes It’s the Owners Who Slow-Pay
We recently had a fascinating conversation with a senior accountant at a good-sized general contractor based in California, where this same subject came up. She told us that, when they get paid on time from the owner, then everyone else on the project gets paid on time as well.
But on many occasions, the owners did not pay them on time. And in other cases, owners only sent a partial payment. Not surprisingly, each of these scenarios caused a wave of late or partial payments to cascade through the entire project. (Subcontractors were the first to get hit, and in turn, they were forced to slow pay their sub-subs and suppliers, and on and on, all the way down the project payment chain to the bottom.)
Our senior accountant’s experience showed that, when a payment problem impacted one participant on a project, that same problem usually ended up impacting everyone. This is due to the interconnectedness of the payment chain on a typical construction project. But given this reality, what if anything can be done to minimize the impact of problems on project?
GCs and Subcontractors Can Work Together to Speed Up Payments at the Top
Our senior accountant had an ingenious solution to this problem of slow-paying owners. Here are the 3 steps she took:
- Encouraged all of her subcontractors to send preliminary notices, both to her at the GC office as well as to the property owner.
- Asked each of those subs to request that their sub-subs and suppliers also send preliminary notices.
- Used all of those notices as leverage to convince the property owner to pay on-time and in-full. This cautioned them that any payment delays or reductions might make them vulnerable to a mechanics lien. This word of warning rang true, since all of the project participants had in fact secured their mechanics lien rights.
According to our senior accountant, this tactic usually works. The last thing any property owner wants to deal with is a mechanics lien. A lien filing will probably be way more expensive to manage than any benefit they receive from paying late or not paying in full.
And the beauty of this is that it only took a “reminder” (in the form of preliminary notices) of the power of a mechanics lien to get this desired result. No mechanics liens were filed. In fact, it never even got close to that.
In this Together
We wished that more general contractors and others took this approach to payment issues. When it comes to a situation like slow payments on a construction project, we believe that much more can be accomplished – and better outcomes achieved – when the affected parties realize that they can and should work together to solve these issues.
We’d also like anyone reading this to know that Levelset is in this together with you, too. We specialize in helping construction companies get paid, in-full and on-time.