Getting payments from general contractors

Woodworking pros trade tips on getting payments from general contractors. June 27, 2000

I was wondering if I am the only person who struggles, almost daily, with collecting money owed and managing poor cash flow as a result from long delays in payment? It seems like collecting money owed to us is worse than pulling teeth.

I get so frustrated when general contractors give me a hard time when a payment is due. It seems as though they try to make us feel guilty for wanting our own money.

I could understand their actions if we were asking for payouts prematurely, but this is not the case. As specified in our proposal or contract, which they approve and sign, we don't invoice for an amount equal to a certain percentage until or after we have reached that date. Nevertheless, it could be two to three months or even longer before you receive each payment.

The worst is when they hold back 10 percent retainage for an hour's worth of installation of knobs or pulls, which always seem to be backordered for an eternity. And of course, those darn knobs or pulls are not even in our contract. This happens even with the more reputable GCs.

Applying any type of legal pressure will only be "biting the hand that feeds us." Any suggestions out there? Are we supposed to just accept this and have two to three months of cash in reserve sitting in a bank for working capital? If so, does anyone have a half a million dollars they would like to donate to a good cause?

I guess the old saying, "If business was easy, everyone would be doing it," is true.

Forum Responses
If it helps, you are not alone. I have been waiting for payment on a job for some 12 months and never seem to get any closer.

I really do not have any good suggestions but one thing I have started doing now is selling my company as a "manufacturer." This way I get paid a percentage with the contract, and the balance before the work leaves my shop. Of course there is the exposure at installation, which is always a chunk.

With the last couple of jobs, and at the first sign of delayed payment, I have picked up my tools and left. It gets their attention, and of course they threaten you with the worst; but I am only a small business just like many of us out there, and have had the big one put to me.

I also do consulting work, preparing claims for the same GCs' attorneys that are trying to put it to the little guy, so I have learned a lot of the tricks they try and it helps to a certain point. I have to say though, just when you think you have figured out their angles, another slick character sneaks up from behind.

Cash flow? What's that?

I've been where your at, and things still get tight once in a while. I know it sounds like you'er biting the hand that's feeding you, but the problem is that it's not feeding you for two or three months at a clip. The old saying that the squeeky wheel gets the grease is true. Start squeeking.

And everybody is cut off at 45 days, no matter who it is. Letting someone go past 60 days is your own fault. You don't have to be mean about it, just blunt. That's why all the other subs and suppliers get paid and you don't: They put it like it is. No pay no play.

As far as the 10 percent retainage, that's fair and common practice.

We offer a discount of 5 percent if the final bill is paid the same day the job is completed. We also call the day before we plan to be finished and inform the client/GC that we will be completing the job and will be expecting the final payment. On more than one occasion
I have been told that we have to wait until the bank inspector comes. My reply is always "When is he coming? We'll be there the day before, or the same day, to finish up."

We're not banks. We are not in the buisness of lending money interest-free. Which is exactly what we do when we let anyone charge or delay payment.

You might lose a few customers, but then again you might not. We thought we would, but we didn't.

The private sector gives me no problem, 50 percent down, and the rest when done. But large contractors just plain take advantage of small guys. That's where communication is important, and I have my own contract for them to sign, and payment schedule to follow. If they don't adhere, production stops, and we go on to the next thing that will bring some cash flow. Then they have to answer to their client about why the work is not getting done. Do you think they want to admit that they haven't payed you?

You can bet they bill their client every two weeks to keep their own company going, or the same thing would happen to them.

We're not banks, and talking to them and letting them know where you stand is the best bet. I'm not afraid to let them know I'm a small company and I'll get the job done -- just tell me where I stand in line. Honesty is always the best.

I suggest charging these contractors that are lax on payments more the next time around. Sure, you might not always be the lowest bidder, but then another shop will get stuck waiting, and eventually jack their price, too.

Anyway, you don't stay in business by being the lowest bidder all the time. If you charge more, then you can buy better machinery, hire better employees, and in turn put out a better product for higher profits.

A friendly letter stating that their account is past due, and you will be forced to put a lien on the property until payment is made, may do the trick. Maybe this could also be included in the contract; then you can say, "Well, it was in the contract that this would happen."

As far as a lien is concerned, this is tricky and it varies from state to state. In Indiana you only have 60 days from the delivery date to file a lien. Plus there are other considerations. I would contact an attorney.

As for the cash flow problems, if someone can't pay you in a timely manner I wouldn't mess with them. We have a strict policy: we get paid in 30 days or you don't get any more product, period, no exceptions. You may say I will lose business, but if this is how they operate, can you afford their business anyway? I couldn't. We have bills to pay and we aren't the bank, which essentially is what they are using you for.

One of my competitors' secretaries had a good line: "I have an agreement with my banker, he doesn't do cabinets and I don't lend money."

I don't know what else needs to be said. Too bad she works for your competitor and not you.

Liens are a good idea. Like another said, check with your county for their guidelines, and then put it your contract what will happen if payment is not made. Depending on the amount owed, you can take them to small claims court and they have to pay all your expenses and interest.

It happens to everyone. Be aware of people or companies who do not stay with one contractor or who have employee problems. Ask for references -- they ask you, so you can ask them.

One tactic that works for collection is embarrassment. Go around to the contractor's job sites asking where he or she is, stating he is 60 days past due. If you confront him, do it in public with a crowd around. It ain't pretty but it works as a last-ditch, "I may never get paid" tactic.

Lack of cash flow can be caused by many conditions, one of which is slow pay by your customers, and that is the easiest to focus on.

Other causes for lack of cash flow can be excess inventory, purchasing materials right at the end of the month when you could wait until the beginning of the following month; growing at a rate faster than you can capitalize; paying cash for machinery that may be better off financed; and last but not least, lack of profits.

It can also be excess profits tied up in work in progress (WIP), inventory and accounts receivable (AR). You may want to consider an operating line of credit with your bank and sitting down with your vendors and negotiating 45- or 60-day terms or at least letting them know you take however long to pay.

Getting a line of credit from your bank or concessions from your vendors still requires you to be vigilant about collecting the money. Each of the other items may have different solutions.

As for the GCs, except for retainage, they each have unique billing cycles. Some ask for invoices once a month, submit them on the 10th of the following month, and get paid 30 days later, which adds up to about 55 days if you invoiced on the 25th and got paid on the 20th, two months later.

Focusing on collecting can make a difference if you aren't growing too fast. Theoretically, if you always had x percent of dollars out 60 days, it would take you anywhere from 10 to 20 months to get to a point where your current cash flow was able to sustain your operating expenses, assuming no growth or ups and downs (a banker's fantasy). This is why you need a line of credit.

You also need to communicate with the GCs you work with, and know their billing cycle, and why it takes so long to get paid. If they are not chasing the money then they aren't doing their job. It is all about getting paid in a timely manner and you need to find or work with GCs that understand that subs that are paid on time are loyal subs. It takes time to develop these relationships.

Remember too, your pricing also needs to include your carrying costs.

I would not take the step of embarrassing the GC on the site. This may work if you don't want to work for them again, but could lead to other, greater problems.

You need to learn how to do a cash-flow projection for a year (unless you update every aspect of them every couple of weeks they are just that, a projection, but in a spreadsheet you can determine what a 32-day collection period does to cash flow versus a 45-day collection period). Ask your accountant for help on this.

Story of the wood trade: Takes time to make things, get them out the door and installed. Meanwhile, the rest of the world you deal with trades off the rack, over the wire, and expects prompt payment.

Dealing with customers directly is my preferred work but most jobs involve contractors. Contractors are going to use us and and the rest of the trades as a bank. Expect that up-front in your bid. Reward good-paying contractors with lower bids, and tell them you are. Bid slow-paying or problem contractors high bids, but always bid.

Stay in touch with contractors on progress and create a paper trail on all items involving cost to you. Favors cost you; get change orders instead. Bill according to your contract, prompty. Read this contract according to the contractor's terms, TO and FOR YOU. If it says 30-day periods, expect payment and call promptly if delays happen.

Lien as you complete a job that has had slow payments. You will get retainage, but don't waiver until you pick up the check by hand. Pick up all checks in person if at all possible; this is quite effective PR and rewarding to the spirit.

A bank line of credit is fine as a last resort. Show up with your contract or purchase orders to the pledged job. That way, the banker sees proof that you will promptly pay off the note when that job is paid.

Charge enough to start with. Do you really know your job costs and overhead? Do you realize a profit annually, and are you creating long-term assets?

I had cash-flow problems until I realized: That's my money, not theirs. I want mine, now.

Good communication is the key. The contract is the best form of communication, because it can always be referred to at a later date, if there is some question about the terms.

Don't be afraid to ask why you're not being paid, and try to work with your customer to stick with the terms. The biggest problem in dealing with GCs is that you're never talking to the person who is actually pulling the trigger. Get to them, and you'll usually find your money.

The comments below were added after this Forum discussion was archived as a Knowledge Base article (add your comment).

Comment from contributor A:
On the subject of generals taking forever to pay, I developed a simple and easy method to deal with them. It is a contract which it spells out exactly what is due and when. Since Texas has a mechanic lien law, I do not hesitate to use it on those that try dragging out the payment. One point - is make sure up front that you expect payment - you are a professional delivering a service and you are owed your due. Once the GC starts trying to explain that he does not work that way, smile and say goodbye. Believe me - it is better having two or three general contractors that pay on completion than chasing ten or more around trying to collect payment.

Comment from contributor B:
I started working as office manager for a small custom cabinet company in 2002. I had never worked in the construction business before, and was told by the salesman that I "just didn't understand how the GC's do business." Well, I saw very quickly how they did business - one contractor was 6 months past due!

I wrote the contractor a firm but polite letter asking for payment. After one week, I called his office and spoke with him. He gave me a line about a slide on an entertainment center door. I told him I would be glad to take care of it for him, scheduled a service call to the house with a delivery we were making to the area, and asked him to meet our guys at the home with a check. Our guys brought a check back for payment in full and I allowed him to save face.

The salesman whined about how we would never hear from that contractor again because I had probably p***ed him off. The contractor called the next day to ask us for a bid on his next project and told the salesman how much he looked forward to working with me.

I have found that to collect from most contractors, I just need to remain polite and professional, but persistent and firm.

Comment from contributor C:

I expect final payment on installation! If they can't be there with the money at that time, they can pay the day before. Most general contractors will trust other craftsmen as much as they trust themselves. Whatever they do, don't let them hold your money. If you earned it, it's yours. Remember, a few GC's like to play musical chairs with your money. They will recieve your money from the homeowner or bank, and spend it elsewhere. Whatever you do, never be bashful or intimidated to ask for what you have earned. Present your bill in person and keep your hand out till you recieve your money.

Comment from contributor D:
I've found that telling them you are going to turn over the account to a collection agency works pretty well.

Comment from contributor E:
If you have to sit on (lend) money to your GC's/customers like you're a bank, charge them a handling fee just like a bank. I had a few customers that were routinely late. I changed my contract to include a late fee and interest. I also figured 30 days interest into my estimate pricing. The increase was minimal, but it gave me room to offer a discount for payment upon completion and to still be paid in full. You might want to adjust to 60 days for your customers. You might also want to offer a 10 day option discount for half the interest. At 31 days you invoice the customer with the late fee and interest. Just make sure the interest rate is more than what the bank charges you for the same timeframe. I like to use the maximum rate allowed by law. Check with your local chamber of commerce or SBA reps. They can give you the details that pertain in your location.