One of the ways that a subcontractor can preserve its cash flow is to clarify issues involving the scheduling of values during the pre-subcontract award process. This may include mobilization, weighting of material and labor values, and payment for stored materials.
Mobilization. A subcontract should allow for early payment of mobilization costs, including engineering costs as well as insurance and surety bond premiums. Many contractors have no objection to this practice, particularly if their draws are based on the amounts they pay out.
Weighting of material and labor values. Generally, billing for material is rendered in advance of billing for labor. Thus, a subcontractor should assign adequate value to the material portion of its work. The subcontractor should also be sure that it assigns adequate labor amounts to on-site work that will be performed during the early stages of the job.
Stored materials. A subcontractor should be entitled to payment for fabricated material delivered to the jobsite prior to installation. This should also apply to material stored at an off-site location approved by the contractor or owner. The subcontractor should provide the contractor with a bill of sale, documents confirming delivery, and evidence of insurance in order to be paid. Typical language may state:
“Monthly progress payments to the Subcontractor shall include payment for materials and equipment not incorporated in the Subcontractor’s work, but delivered and suitably stored at the site or some other agreed upon location.”
Clarify Payment Timing. Subcontractors rely on monthly progress payments from customers to maintain their payments. Thus, the subcontract terms governing payment timing are critical to subcontractor cash flow, and subcontractors should carefully review and understand the terms governing payment timing.
Monthly Progress Payments. A subcontractor should establish a firm date each month on which payments are due and payable. Otherwise, a contractor can conveniently contend later than it could hold the subcontractor’s money long after having been paid by the owner for the subcontractor’s work. For example, a progress payment clause should provide:
“The Subcontractor will be paid monthly progress payments on or before the 15th of each month for the value of work completed and the value of materials suitably stored on or off-site during the preceding month.”
Final Payment. To the extent practical, the subcontractor should be sure it has an understanding with the contractor that it will be paid within 30 days after completion of the subcontractor’s work. At that time, withholding should be reduced to no more than one and one-half times the value of any incomplete punch list work.
The American Subcontractors Association is a national trade organization representing construction subcontractors, specialty trade contractors, and suppliers. For more information about ASA, visit www.asaonline.com.
Be sure to join the Lowe’s ProServices LinkedIn Group to read additional content and interact with other Construction/Trade and MRO professionals.