I need some advice. I have been given a verbal approval for a large (for me) commercial cabinet job by the project manager. My terms stated in the bid are 50% deposit, 40% upon delivery, and 10% upon completion of installation. The contractor's pencil pusher number cruncher is telling me that they want to be on a joint-check account. This seems to be a bit over the top. Should I stick to my terms or compromise?
(Business and Management Forum)
From contributor W:
Are you going to marry this contractor? That's the only way I'm going to go into a joint checking account with someone.
The "verbal" contract, on the other hand, is an invitation to trouble. A contract requires a meeting of the minds as well as a mere consideration. Even a simple list of what you are going to do (and maybe what you aren't going to do), initialed by both parties, can save you a lot of grief.
Yeah, right. My suppliers are not going to give a contractor charge accounts on the spur of the moment. I just proceeded to put my contracts back in my briefcase and told him that we were unable to do business with him unless it was on our terms. I actually felt good when I left because I stood my ground. I would have bet money that that contractor would have screwed me in the end anyhow.
Just one question: while you are installing the job, and earning the last 10%, what's to stop the bright boy from withdrawing the balance of the joint account, leaving you with paid bills and the final 10% only?
The customer is buying a product from an independent company. The deposit is to insure the customer pays, and the retained amounts are to insure you deliver. If the two of you can't trust each other 50/50, walk away and avoid the eventual lawyer fees.
I agree, if they don't feel comfortable with 50/50 after all the above... not only would I be incredulous at such a request, but I would begin to wonder if they are trying to set you up for a fall later, in one form or another (i.e. identifying your costs to undermine future bids, unreasonable hold-back of funds to eventually squeeze some sort of discount out of you, identifying your suppliers to cut you out of the middle for future jobs, etc.).
I would simply explain that you offer all the above to provide their company the opportunity to perform due diligence prior to choosing you, and that in all your years of doing business, you've never heard of such a request. Further explain that the 50% covers most of the materials (there are always incidentals) and only part of the labor, and none of the operating costs or profit, so you are already contributing your fair share in the risk equation. Use the Home Center example where they want 100% upfront before they order anything for stock products, and you are only asking for 50% upfront for custom, along with scheduling benchmarks for the remaining payments. At some point, certain requests (and remember this is something they are requesting, subject to negotiation) become unreasonable and don't pass the stomach test.
If they still insist on a joint account after all this, I would, like others, suggest walking away from this one. If not, just like in college, when your stomach warned you not to take another drink and you "took a chance" or ignored it and did it anyway, despite the warning, you get what you deserve.
I have used this type of agreement with my suppliers on very large jobs where I personally could not purchase all the raw material out of pocket. By using a joint check agreement, I was able to minimize cash flow impact, contract for a very large job, and I didn't have to go to the bank and borrow money.
It also allows the questioner to purchase more material than his (supplier) credit line will allow, and - God forbid - if there's a problem with the material itself, the supplier will be much more interested in resolving the issue. A joint check agreement really is a win-win-win situation.
1. The customer will learn your suppliers, subs, buy-outs and exact costs.
2. It doesn't take a rocket scientist to determine your expenses, and you leave yourself open to getting screwed later because the customer determines you are making too much profit on the job.
3. If you don't have the cash or credit to finance the job on your own until you get paid, you are in too deep. This job will have the potential to break you financially if you don't get paid in the end. How many posts have there been here in the last few years about the job that gets delayed? The cabinets are complete, but the contractor isn't accepting them or ready to have them installed. Maybe this job isn't the answer to your dreams. I would never take a job I couldn't afford to eat if I had to and still remain in business.
In addition to the joint check agreement, you would also need to have a separate agreement with your supplier detailing the disbursement of the joint check(s) that are received.
Yes, your customer will find out who your supplier is, but itís likely heíll know that anyhow, depending on the specs. I canít see any way the customer will ever learn any more details of your business than that.
If in fact the pencil pusher wants a joint check agreement, ask him to fax you a copy of a similar agreement he has used in the past Ė if heíll do that for you, that will educate you considerably.
2) Your supplier very likely has a better means of determining the credit-worthiness of the customer than do you - at the very least, two heads are better than one.
There can be many reasons not to take on a really big project, but one reason is all a man really needs. Study it hard!
Tomorrow (Monday) I meet with the contractor to settle these issues. I will offer as much insight to my company as is prudent to make them comfortable. I won't change my terms. I'll just have to put on my selling shoes (hat). Look for my post Monday night.
You may have just lost your supplier too.
"2) Your supplier very likely has a better means of determining the credit-worthiness of the customer than do you - at the very least, two heads are better than one."
Determining "credit-worthiness" in today's economy isn't easy for anyone, no matter what the size of the business - i.e. Enron, Worldcom, etc.
To the original poster: Trust your feelings on this one. If it doesn't feel right, don't do it. All of these warning bells and alarms keep going off, and you know they are, but the thought of a big payday has you ignoring them. Ask for their Dunn and Bradstreet rating. Ask them for references from previous subcontractors. For that matter, why aren't they using their last cabinet shop for this job? Is this a new market (new city) for them? If not, then you'd be wise to find out what's going on. Are they churning through the cabinet shops screwing each as they go along, and you are just the next name on the list?
The joint check is a common practice in commercial work for assuring the contractor that 2nd and 3rd tier subs get paid. It is not a joint checking account in any way. The joint check doesn't require you to disclose how much you are paying the subcontractor or supplier, it only requires that you go to the bank together with the supplier and split the payment - it's a pain in the butt, but I would go through it for a 50% deposit. Another common practice is to require a list of 2nd tier subs and suppliers and to get a lien release from each one before release of progress payments. Some contractors want to see your financial statements before awarding you a big job - sort of a reverse credit check. Keep in mind that for every shyster GC, there is at least one dishonest lowlife subcontractor, and in hard bid commercial work, it is very difficult to know who is who, which is why these practices are in place. They become unnecessary and are usually abandoned when there is a trust relationship built.
As for the "verbal contract" dispute, in many states, the tendering of a written or even a telephoned bid by a subcontractor implies that the subcontractor will accept a contract if it is offered. (In public commercial work this obligation of the sub is balanced by an obligation of the contractor to use the subs he lists on his bid form.) Even if it's a private job, declining the contract is very bad form and will get you blacklisted from negotiated work in the future if you do it more than once or for trivial reasons. Having said this, a verbal arrangement with a project manager is not legally binding on either side. A lot of PMs don't know their company policies as well as they should and they may, with the best of intentions, promise something they can't deliver. It's incumbent on you, the subcontractor, to read the contract carefully and be sure the terms you agreed to are in there - if not, you can write them in, make a phone call, have a discussion, etc. until you get what you want. You may not get everything you want but you can make a reasoned business decision about whether you want to proceed, keeping in mind that they need you as much or more than you need them.
In all the time I've been doing this I have never encountered anyone who wanted to just buy my labor or control my business in any way (other than insisting that I put them ahead of everyone else in my schedule). Commercial contractors as a class are mostly interested in one thing - a trouble free, smooth operating project where they can trust every sub to do their job 100%. They don't care how much money you make as long as you don't try and get a penny more than your contract is written for. In fact, they love big change orders because they make a markup on everything they sell to the end user. My contracts frequently require me to reveal line item labor and materials costs for change orders, along with overhead and profit, and as long as I'm fair, I have never had a problem.
Once the contract is signed, you have to continue to be alert, and the whole thing comes down to the quality of your customer. I have at least 100 in any given year, of whom more than half are repeat customers. Of the rest, I usually end up with one or two deadbeats or pure incompetents who don't get the privilege of working with me again. The quality of my customer list has a lot to do with the fact that I am almost never the low bidder, which I consider the key to success in the commercial world.
The contract you sign is a legal document that can be used a guide to the proceedings or a bludgeon to hurt you with and it's generally tilted away from you and toward the contractor, so it all comes down to relationships in the end. If you want to do this kind of work you have to accept the conditions as they are, and if you can get a 50% deposit you are working with a better set of conditions than you will find in most places.
How would you treat those trades who are last on the job? Are they pressured to make up time for all those trades who came before them? How do you distinguish who (and how much money) you hold responsible for the delays?
There are two types of damage claims that I'm familiar with - the legal ones that arise from the terms of your contract and the informal ones that arise because the contractor has your money and can dare you to come and get it. Both types come into play when you have genuinely done something to delay the project or when you can't prove that you didn't. Neither will come into play if you are working with a quality customer, except in the most extreme circumstances when it's really your fault - and if so serve you (or me) right.
Contractors often sign contracts that have liquidated damage clauses of a stipulated amount each day that the project runs past a certain calendar date, or number of days from notice to proceed. There are also clauses that exact actual damages in some cases. A lot of this has to do with real potential financial loss to the end user of the building, who may have to be out of his old building by a certain date, or is contracted to produce a product by a certain date, or a school where the teachers start getting paid by contract on a certain date. We did work for Intel Corporation, who had to get product to market through the facility we were working on or risk losing millions of dollars a day - so there's often really something at stake.
So when things start going wrong, the contractor starts documenting who is at fault. Liquidated damages are assessed in proportion to the fault of each subcontractor. This is why it's important to avoid signing a contract that has a calendar date as the completion. It's better to be committed to a certain number of days from notice to proceed, so that all your time isn't used up before the contract is even issued to you. The spec book will often have the project duration or calendar date completion in the bid form, and if so I will put in my proposal some language such as "in order to meet the project completion date we will need a written notice to proceed by x, an executed contract by y, we will have our submittal drawings done in two weeks from such date and they will have to be returned with all information color decisions, etc., by xx, we will need final field dimensions by yyy and the solid surface, veneer, etc. specified is a long lead item that must be ordered by the first, so we will be billing for this and must be paid in our first draw..." and so on. This lays the foundation for a good project and gives you something to refer to when they are accusing you of being late. As the project proceeds you can document each delay to your processes in a non-threatening, professional manner and keep storing up time. The woodworker often looks like the culprit at the end unless he can prove otherwise, but a fair contractor will look at the whole project and your documentation will really help his decision. He can certainly ask you and even pressure you to do more to help him at the end, and you can respond in proportion to how much you can afford and how much you want his future business. If he wants you to work around the clock, he can pay you overtime - another clause in my proposal states that no significant overtime is included, or that I have included significant overtime in the knowledge that it will be a fast track job and that's why I'm so much higher than the next bidder who's not planning on getting done on time.
Unfortunately, if you are working for a jerk, all this may be in vain, but it will help you in court or in negotiations at the end. These are the guys who just withhold money arbitrarily, even if there is no contract language to support them - fortunately they are few in my market and I just weed them out of my customer base. Checking with other shops in advance is a good way to avoid them - they are probably coming to you because they used up everyone else. I've paid damages twice in 25 years, both times my fault.
On a bonded job, payment is virtually guaranteed so the supplier has very low risk, there is no "you don't have to pay them out unless the GC and bonding company default," in which case you may be on the edge and a reasonable vendor would share the risk and work with you.
Comment from contributor F:
Joint checks are very common in large core construction projects, not as common in TI. Often, it is a requirement of the construction lender and may be handled through a fund control, an independent third party hired by the owner as a condition of receiving construction financing. They are responsible for reviewing invoices of all contractors, subs and suppliers to verify that the job is not over-billed in order for construction loans to be released.
If you are doing large commercial jobs, you should be prepared for joint checks, lien releases, warranty letters, liquidated damages, prevailing wages and insurance certificates with additional insured endorsements among other things. Also, be prepared for a 60 day plus pay cycle, as processing all the paper (along with a formal process for approving contracts and change orders) takes time.