One of the things that frustrates me about the relationship between contractors and owners is that owners act like they’re doing us a favor by letting us take all the risk in the financial transaction. It’s as if contractors are not trustworthy and owners and their designers have to discipline contractors through burdensome retention, slow pay, contesting percent completion, and withholding the acceptance of the work. Somehow, over the years, we have accepted this role of “Peck’s bad boy” and have come to believe that we have no right to stand up for ourselves.
A Case History
Many years ago, my brother and I were construction contractors in New Jersey. Among other things, we built schools, churches, and office buildings. At one point we were building a enormous church with classrooms attached. I called the architect to advise him that I would be hand-delivering our first monthly payment requisition, and I reminded him that our contract called for payment by the 20th of the month. He advised me that they would inspect the amount of work completed in due course, but that payment would not be made in that short amount of time. I sent a certified letter advising if we were not paid by the 20th of month the work would stop on the 21st. I also copied the owner of the project. The architect called and was incredulous.
“No one gets paid that quickly. Are you crazy?”
“I expect to be paid in accordance with our contract” I replied.
“The owner can’t pay you until we review all the work and complete our inspections. That might take a while. We’ll let you know when we are completely satisfied. Do you understand?”
“Yes I understand but I will be shutting down the job on the 21st if not paid”
“Excuse me.” The incredulous voice said.
“The terms of our contract with the church clearly state we are to be paid by the 20th of the month. If not, the church will be in breach of our contract, and the job will shut down.”
“Are you new at this game? No one demands payment in 20 days. It just isn’t done in this business. Things are too complicated. It takes time to process payments. Everyone knows that.”
“I don’t know that and I don’t accept it. I expect to be paid in accordance with the contract.
The design firm called for an immediate meeting with me and the owner. I was defying the one-sided traditions they had always relied on. Their lawyers tried to intimidate me by threatening to sue, claiming I was in breech. I replied that “in the meantime no work will be done.” The savvy owner’s representative in attendance (with a slight smile on his face) instructed the design firm and the lawyers to adhere to the contract terms as written and pay by the 20th of the month.
The Moral
One of the main causes of cash shortages in the construction business is owners’ slow pay. When a contracting firm is growing and building multiple projects simultaneously the amount can grow quite large (sometimes into the millions of dollars) as owners delay payments beyond 30 days to 60 and, sometimes, 90 days. Without realizing it, contractors are extending credit to project owners without charging interest or demanding prompt payment. This is, of course, terrible lending practice and would put a bank out of business in short order. It often does put contractors out of business.
We’re Not Lenders
If contractors see themselves as lenders, they should conduct themselves accordingly. The humble subservient attitude I have seen most contractors adopt when it comes to getting paid is a damaging precedent that exacerbates contractors’ financial risk. When I described the contractors’ approach to getting paid to a financial analyst friend he looked perplexed and asked, “Why would they do that?” Good question. Why do contractors do that?
A Bad Habit
I contend that it is nothing more than a bad habit engendered by a bad belief. The bad belief is that contractors are selling finished buildings to project owners (government agencies and private developers) who are only required to pay if the owner is satisfied with the product. This places all the financial risk squarely, and inappropriately, on the contractor’s shoulders.
Contractors Are Construction Consultants
Contractors are construction consultants who have no ownership of the asset they are building. The financial transaction they enter into with project owners should look like this:
- Contractors are hired based on their reputation for professional excellence.
- They should be paid a large deposit before work begins to cover their initial expenses.
- They gather and approve all costs (including payroll expenses) monthly and submit them to the owner for timely payment. (If owners are not forthcoming with timely payment, contractors should not have to shut the project down. It should shut itself down).
- Contractors are paid a fee for their construction management services agreed upon in advance and detailed in the contract they sign with the owner.
Act Like Lenders
Contractors are not lenders. Realistically, they are construction management consultants who should accept no financial risk. But since that is not the case in the real world where contractors are forced to finance the owner’s project, we must begin to act like lenders not borrowers.
For more information on getting paid , read more at: PAID
For a broader view of cash management , read more at: CASH
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