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Progress paymentsTime is not on your side
Cash flow. No two words are more important to subcontractors.
Progress payments are the monthly lifeline that subcontractors depend on to provide the funds to pay employees, suppliers and sub-subcontractors, and to fund other essential business functions. Unfortunately, many subcontractors have learned the hard way that this lifeline can be a vulnerability when customers' payments are improperly delayed. The secret of the successful subcontractor is to manage relationships with customers with a positive attitude while protecting against the financial harm created by potential late payments.
Progress payments made in accordance with the contractually agreed terms keep the subcontractor's business running and foster fruitful, profitable relationships among the members of the project team. By contrast, when an expected payment is delayed, the lifeline dries up and leaves the subcontractor in the lurch, scrambling for funds to pay bills as a result of someone else's unreliability.
While some payments may be delayed for a reason allowed under the contract, such as an amount disputed in good faith, payments are just as often improperly delayed. Most subcontractors have learned through experience to plan for the contingency of late or partial payments. While any delay creates a difficult cash flow position, there is also a matter of degree. Some customers will miss the due date in the rarest of circumstances, others are chronic late payers and then there's everyone in between.
You've got choices
Given that late payments are a reality, what are your options to minimize the damage they cause?
First, realize that you are not only a subcontractor but also fundamentally a creditor (surprise!) because you perform work on the promise of a future payment by a customer. Establish a date certain for payment in the contract and stick by it. You may wish to condition your bid on use of a document such as the American Institute of Architects' A401, which sets forth an unambiguous schedule for payment applications and receipt of progress payments. There is nothing wrong with being a creditor per se, but when a payment is improperly delayed, the trust relationship that is the basis of credit is broken.
Second, recognize that you, as a responsible creditor, must hold up your end of the bargain according to the payment rules that you agreed to in the contract documents. Too many payments are delayed because of improper or late invoicing. No matter how bad the situation is, it never helps to be the one who submitted the wrong paperwork.
Third, and most important, realize that you must have collection tools at your disposal. For example, establishing the contractual right to suspend work can be an effective tool to force the issue of late payments to be addressed. Consider incorporating penalties for late payments with interest, de- and re-mobilization costs and the ability to recover attorney fees during a dispute.
A trust fund provision in your contract would say that moneys received by a contractor for work done by you are to be held in trust for payment to you. Many widely recognized contract documents, including ASA's Addendum to Subcontract, the AIA A401 and the Associated General Contractors of America's 650 document, include provisions helping subcontractors collect unpaid amounts. There are important differences among the documents, though.
These are just a few ways that you can improve the experience of handling late progress payments. ASA's Payment Advocacy Year Web page contains many more ideas and payment resources.
This article is provided in conjunction with ASA's Payment Advocacy Year.
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