A Case Study
I was very young when I found myself running the field operation of the contracting firm my brother and I started. After a number of years, we were the successful bidder on a church nearby. We diligently submitted our first payment requisition to the architect expecting payment on time as clearly stated in our contract. Just to be safe, I sent a registered letter to both the architect and owner (church building committee) stating exactly that.
- The architect flipped his lid:
“You never send letters directly to the owner. You can only communicate with them through me. And you cannot be paid in any specific number of days after submitting your invoice. Don’t be ridiculous. No one pays like that. It’s impossible. You’ll get paid in due time after my inspection of the job and forwarding the approved payment application to the owner. That’s the way it’s done throughout the industry, and that’s the way you’ll get paid” he raged over the phone.
- I didn’t argue with him, but immediately sent a second registered letter to the architect and the building committee informing them of my intention to shut down the job unless I was paid exactly according to the terms stated in our contract. I did this, of course, out of necessity since my brother and I didn’t have enough cash to finance all the projects we had in progress.
- The building committee called for a meeting and told me that they didn’t have the cash on hand to pay within the number of days specified in the contract because it takes 30 days to draw down the funds from their out of state bank.
- I didn’t argue but reiterated that I would shut the job down unless we were paid in accordance with our contract. (luckily their lawyer understood.)
- Finally, after agreeing that they had enough to make this first payment on time they asked if I could estimate the future invoice amounts in advance so they could draw down sufficient cash in advance to pay within the contract time.
- I told them I would do that with pleasure.
- They paid within the contract time throughout the entire length of the job.
- My brother and I never had to front the cash to cover delayed progress payments.
The Magic of Naiveté
I was so young when I started as a contractor that I didn’t have enough experience to know about the firmly held industry beliefs that guided contractors. Back then, most contractors believed that progress payments were solely contingent on the approval of the architect and the good faith of the owner. In fact, contractors didn’t believe that the payment terms in their contracts could, or should, be enforced to the letter. Rather, they accepted that their reputation for accurate, timely billing was suspect (with some historic justification). Contractors were notorious for “front loading”, and some had a reputation of “cutting corners” to save time and money. Architects seemed to believe that all contractors used these methods and that it was the architect’s duty to catch them at it on behalf of the owner. In other words, everyone seemed to believe that contractors were scoundrels to one degree or another and didn’t deserve to be paid as billed. In my naiveté this belief never occurred to me. I had every intention of submitting accurate, timely invoices and expected to be paid in accordance with our contract.
My Belief
I believed, on the other hand, that architects and owners were scoundrels if they didn’t want to pay contractors until they were good and ready, and I had no intention of letting them take advantage of us. Notice what different results different beliefs can lead to? Because we believed that we were supposed to be paid as stated in the contract, we insisted on payment and stood our ground until the architect and owner relented. I guessed that most contractors never read the fine print in their 30-page contracts. I did because it defined the payment process, not because I was wise.
Industry Unexamined Beliefs
For the last eight weeks we have been examining the power of beliefs that affect business decision making. Our industry holds onto a number of inaccurate, unexamined beliefs that have damaged contractors’ cash flow and their ability to make a fair profit on every job. Examples of inaccurate beliefs:
- Low bid acquisition is a reasonable process and practice.
- Progress payments should be based on estimates of project completion.
- Profit and loss accounting are calculated on guestimates rather than hard historic financial data.
- The industry is eligible for only limited access to growth capital.
- Cash flow trumps project profitability.
- Working capital lines of credit should be based on the value of the contractor’s personal assets rather than the value of the construction contract.
- Increases in fixed overhead represent company success.
All of these “beliefs” are inaccurate and lead to high-risk decision making that oppresses contractor potential profitability. The construction company my brother and I started went on to a second generation because we were naive and never allowed slow pay to put our capital at risk. My ignorance fit into an age-old belief: “Where ignorance is bliss… …tis folly to be wise.”
For more information the role of business beliefs and how they relate to the construction industry, read more here: BELIEFS
For a broader view on financial change management, read more here: CHANGE
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