The groundwork for prompt payment and good cash flow must begin prior to the awarding of a contract. It is all too easy for an unscrupulous contractor to hide behind unfair payment terms and answer your pleas by telling you to “read your contract.”
Unfortunately, stringent subcontract language may legally obligate you to continue to work for extensive periods without being paid. Worse, contingent payment language can cause you to lose the right to sue, proceed against a surety company or even maintain a lien on the job.
You should build into your company’s routine procedures specific steps to address recurring problem areas while negotiating fair payment terms. These steps should include:
• Conditioning your bid on your own payment terms. You should develop your own proposal form, not only to clarify the payment terms on which your bid is based, but also to confirm your understanding about the scope of work, related work by others, scheduled time for your performance and any unclear, contradictory or potentially troublesome items. One way of handling your bid clarifications is to state that the bid is subject to the terms of the ConsensusDocs Form 750 Standard Agreement between Constructor and Subcontractor.
• Overcoming unfavorable contract payment terms. Address any language in the bid documents stating the contractor’s or owner’s standard subcontract form will be used. By bidding without clarifications, you may be offered unsatisfactory payment terms and reminded that your bid price was to be based on those terms. To avoid being precluded at the time of bid, you should—at the very least—state that your bid is subject to mutually agreed-upon clarifications.
One of the key factors in assuring your company’s cash flow is to evaluate the credit of the general contractor or construction manager with which you are about to do business. In some instances, the process can start before you decide to bid. You may be surprised about how much information you can find about a prospective customer through an internet search.
In addition, credit services such as Dun & Bradstreet may be helpful in identifying the size of the general contractor, the experience of its officers and any current major problems. However, the reports often have limited value in evaluating the contractor’s true financial worth. Similarly, the contractor’s financial statements often are difficult gauges because of progress payments and retainage, which may be inconsistent in reflecting money owed in relation to monies collected.
The best initial source of credit information is the contractor’s bank. Therefore, you should request the name of the bank or banks that the contractor uses. You also may want to consider requesting that your customer provide you with at least a partial copy of the prequalification form that it provided to its customer. See the ConsensusDocs Form 221 Constructor’s Statement of Qualifications for a Specific Project for a sample form.
Finally, do not overlook any previous experience you have had with the customer. Negotiate payment terms tailored to address any past abuses you have encountered with that customer on earlier jobs. Exchanging information with other trade contractors also can be helpful in getting an idea of the customer’s character and ethics, as well as paying habits.
If the customer is a high credit risk, try to get a check for material before starting on-site labor. Also, be sure to establish a clear contractual right to stop work or hold up completion of your installation if your payments are not kept current. For major risks, consider some form of direct disbursement, joint checks, escrow or similar arrangements.
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.
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