PERSPECTIVE:

I started my after-college career with Kummer Construction Company in 1968.  We grew into HBE Corporation and designed and built over 1800 medical and financial facility buildings throughout the United States.  As Controller and Chief Financial Officer, I managed all the cash for this company through the growth and the mad-dash heyday years, working with owners to establish payment terms and conditions that worked for all parties participating in their projects.  We were paid by the tenth of each month and we paid all subcontractors by the 20^th of each month.  Further, we routinely would make payments to smaller, undercapitalized firms upon receipt of their billings and well in advance of our receiving payment from the owner.

Timely payments by the owner and timely payments by our company to our subcontractors was essential to our success.  We demanded that our client’s contract under our terms of payment and we held fast to that demand in all contract negotiations.  We made these demands as this was clearly in the best interests of the project and all participating parties.

HISTORY:

Over the years it has always been an important ingredient of a successful commercial construction project for money to flow timely from the top down to the general contractor and then from the general contractor down through the various trade contractors performing their work.  Whether written in contracts or not, it has always been a “pay-when-paid” industry and the payment by the owner started the flow.

The owner would pay the general contractor by the tenth of the month, every month without fail, and the general would then pay their various subcontractors by the fifteenth of the month.  A ten percent retention was held on the gross amount billed.  It was almost unheard of that a subcontractor would not be paid for their work by the time they sat down to prepare their next month’s payment requisition.

If the owner did not pay the general contractor by the tenth of the month, this would invariably set off a set of actions that would quickly result in either finding a solution to the payment problem or a stoppage in the work.  The option to continue working without payment did not exist as a viable and workable option for the trade contractors that had the obligation to pay their workers on a weekly basis.  This option of simply not paying—for whatever reason–did not work then and does not work today.

As computers came into the picture and lenders became more actively involved, interest rates were running high, and attorneys seemed to carry more weight with contract terms and conditions, many owners started to slide from the tenth of the month to the fifteenth, and even the twentieth of the month.  To combat that slippage in time, many general contractors moved up the payment requisition date by five or ten days to give the owners and lenders more time to go through their approval and payment processing routine.  

At this stage of our industry, general contractors were not willing to allow the monthly payment date to slip beyond the fifteenth of the month.  It simply caused too much chaos and too many problems for the smaller trade contractors.  General contractors held firm in their negotiations with owners as they recognized the importance of taking care of their subcontracting force on a timely basis.  It was commonly known that general contractors did not have the financial capability to pay all trade contractors in advance of receiving the funds from the owner.  This was the owner’s project, not theirs, and the money to pay for labor, material and subcontracting firms simply had to come from the owner; there was no other pot of funds.

There used to be a time in our industry when contracts meant something.  If the owner agreed to pay by the tenth of the month within the written contract, well, that is what happened.  Payment was expected by the general contractor, promised to the various trade contractors and suppliers, and the option not to pay was unacceptable by all parties.  For the majority of the trade contractors, they did not have the financial capability to continue working, continue to incur labor and material costs, continue to manage their business in an acceptable way.  Everyone involved in the project, including the owners, understood that, accepted that, and worked to stay within the boundaries of acceptability.

At some point in time, the owners and various buyers of construction services seem to have convinced several major general contractors, as well as the leaders of our industry, that fifteen or twenty days was simply not enough time for them to process a payment acquisition.  Major general contractors that could afford to wait a bit longer for their project funds bought into the wishes or demands from owners as to the payment delay issue.  Instead of ten or twenty days, general contractors were willing to give the owners up to thirty days to process monthly payments.  Contract language was changed and the larger general contractors, willing to accept work under these terms, eventually caused the smaller general contracting firms to start accepting this expansion of payment time as well.

The trade contractors were caught up in this change with the flow of monthly payments rather unexpectedly.  For years, many general contractors would continue to pay their smaller trade contractors in advance of receiving the owner payment as they knew they needed the funds to survive—or certainly to continue working.  They could make these advance payments as they knew they could rely on receiving their owner payments on a set date—or very soon thereafter.  All parties involved in a large commercial construction project accepted the well-known fact that monthly payments had to be made at a set time or work would stop until the money was found.

Over the years, many of the larger industrial giants such as Mallinckrodt, Procter & Gamble, Anheuser Busch and many others started to extend their payment terms to thirty days and beyond and as they worked with a rather select group of general contractors and subcontractors, this extension of time seemed to be accepted, or tolerated by all.  Many of these industrial giants were known to pay in advance of the time stated in the contract so their terms did not have the same damaging effect on the trade contractors that worked on industrial projects.

I have just described the payment process that existed throughout my career.

THE CHANGE:

And then InBev came to town and acquired Anheuser Busch. 

InBev rather proudly announced that their terms of payment for construction projects were 120 days from the time the payment acquisition was received and approved.  Yes, that is four months in time.  Within months, other industrial firms followed the lead of InBev and increased their payment terms to 120 days.  Within a year, many of the private firms decided that if InBev could get by with this and as the general contractors seemed to accept this change, and projects were still being built, they could move their payment terms to better suit their internal processing needs.  Thirty days turned into forty-five days and slowly moved to sixty days, and even ninety days.  The tenth of the month, as once was the norm in our industry, was totally out of the picture and thought to be a time period that could never possibly work again.

After roughly six months of InBev shaking up the market, the top management of InBev boldly announced that their payment terms for construction costs would increase to 180 days.  Why not, they seemed to get little pushback on the 120 days so why not push the market a bit harder.  For those keeping score, that is six months or one half of a year before the GC would get paid for their first billing.  I know very few trade contractors that could withstand that sort of industry abuse.

This change in payment time, primarily caused by InBev, caused general contractors to pay more attention to this concept of “pay-when-paid.”  On larger projects, it was not feasible, and maybe not even possible, that general contractors could pay all trade contractors in advance of receiving their funds from the owner.  And thus, “pay-when-paid” became gospel.  All trade contractors were expected to accept this and figure out how to make it work for their companies or cease to bid the work on commercial projects.

It seemed there was little concern by the owners as to the devastating impact this had on the trade contractors.  They also turned a blind eye to the impact that non-payment had on their projects as they were so caught up with counting the dollars they were saving on their precious “cost of capital” line.

Owners simply looked for their general contractors to make these payment terms work and general contractors responded by pushing the problem down the line to the trade contractors.  Most of the major GCs stopped doing their own carpentry and labor work, choosing to let other firms shoulder those weekly labor costs until money flowed.

The workers, the unions, the IRS, the State, and material suppliers did not participate in this pay-when-paid mentality.  Their terms did not change.  Workers still expected to be paid weekly, without fail.  Unions still expected their various benefit payments monthly and, in some cases, weekly.  The IRS and the State wanted their withholding taxes weekly, they did not care how long it took an owner to process their payments.

The trade contractors that were providing all the labor were expected to somehow make these expanded payment terms work.  To add insult to injury and injury to insult owners looked for anything that may possibly be incorrect or incomplete on a general contractor’s payment requisition.  The general contractors did the same as they went over each trade contractor’s billing with magnifying glasses.  It seemed as if owners and GCs looked for any reason they could find to reject a billing and start the “day” counting all over again.

That brings us up to the happenings of today.  I sense some movement from major owners in shortening their payment periods but unfortunately, any improvement made thus far is going from “very, very bad” to just “bad.”  Most major owners proudly state they pay within thirty days but in reality, that hardly ever happens.  Most trade contractors will tell you that if they receive any monthly payment within 45 to 60 days from the date of their billing, that is close to the norm in today’s marketplace.  They will quickly add that it is not unusual for them to wait up to 90 to 120 days and even years for withheld retainage funds and unpaid change orders.

THE RESULTS

For owners, unworkable and unpredictable payment flow results in an unhappy, unproductive project for all workers and all business owners of the firms managing the field work.  That welcoming and nurturing job site culture we like to talk about simply does not exist. 

It also results in a higher price for the owner for their projects as any responsible GC will include the increased cost of capital in their price to the owner.  In addition, any responsible trade contractor that has the financial ability to participate in this sort of project includes interest costs within their pricing.

Furthermore, there are numerous trade contractors that cannot afford to play this game and therefore do not bother with proposals to the general contractor or the owner.  This results in reducing the competition and ultimately increasing the overall project costs for the owner.

The owner may think they are lowering their bottom-line costs by the reduction of their capital costs but that meager savings are coming at a huge hidden expense.  Any GC chasing a project that contains a 120-time period for monthly payments would gladly offer a 5% discount (and probably more) right off the top, which would result in far greater savings for the owner than the few dollars they saved by reducing their borrowing costs. 

It is really not all that complicated.

For general contractors, most of the larger firms can withstand the pay-when-paid process as they pass all the hurt and misery down to the trade contractors.  Responsible GCs realize though that slow payments have a negative effect on their progress and significantly impact on the culture of a job site, in so many ways.  It is hard to manage trade contractors when they are starved for cash for so many months. 

It takes cooperation up and down the line to manage a successful project and cooperation is strained when money does not flow timely.  It is uncomfortable to ask a favor of a trade contractor when the company has not been paid for his last month’s payment application.

A pay-when-if-paid project with a greater than thirty days start with the flow of funds, limits the bidding field for general contractors.  Many competent and reliable trade partners are eliminated at the starting line as they refuse to jump on a burning ship, or they choose to spend their time chasing faster paying opportunities, thus limiting the competition.

Most of the larger general contractors consider their trade partners as their friends; true helpers in delivering a successful project.  They do not want to hurt their friends, and they feel the pain of slow payments much more than the owner or developer of the project.

For trade contractors, they do not have the luxury of passing down the pay-when-if-paid process to their suppliers, their unions, their workers, their overhead costs.  Their working capital is stretched thin, to say the least, as in addition to not being paid for their monthly costs, they are probably waiting for retention funds from the last three projects they have completed.

Slow payments keep trade contractors from supplying sufficient manpower to their projects as they simply do not have the available cash to fund weekly payrolls.  This affects their progress, their control of costs, their natural flow of work.  In addition, it puts stress and strain on the workers as there is often not enough workers on the project to perform certain tasks properly.

Slow payments cause trade contractors to make disastrous business decisions such as borrowing funds from internet, predatory lenders that charge obnoxious interest rates, or greater than normal payback provisions.  Slow payments cause trade contractor business owners to not pay timely their withholding taxes on payroll, their union benefits, and their suppliers.  This results in extra interest costs, penalties in some cases, and liquidated damages assessed by their unions.  In addition, it creates a hostile environment for relationship building which is so necessary for future success.

Even in good times and perfectly run projects, trade contractors struggle to make a 10% profit and overhead on top of their direct costs.  Slow payments can quickly eat into this 10% and in many cases totally eliminate any profit and overhead.  This prevents trade contractors from building up cash reserves for future projects.  Slow payments stomp on the dreams and aspirations of trade contractors.

Slow payments cause family problems at home as your life partner could never possibly understand why you work for months without getting paid.  House payments go unpaid, utility bills are put on the shelf, vacation plans cancelled, and in general, chaos replaces order in everyday living.

QUESTIONS TO ANSWER:

For owners:

What is the primary reason for taking so long to process a monthly billing from your general contractor?  Is the reason to save on costs of capital or is it to mitigate your risks in some manner?

Do you feel the payment practices of your organization are fair, conducive, and helpful for creating a successful project?

Why does it take so long to process a monthly payment application from a responsible, respected general contractor?  It is just a partial payment against a larger contract amount, what are you afraid of?  I would assume the overall contract amount was previously approved in a board room somewhere, why does that prior approval of the total contract amount not carry any weight in estimated monthly payments for work performed?

Where do you think the trade contractors of our industry get the money to fund this harmful way of funding construction projects?  Substantial lines of credit are not easily obtained in the construction industry, especially for small to mid-size trade contractors.  Lenders understand the many risks of construction, but they do not understand this pay-when-if-paid mentality and thus are reluctant to offer sizable lines of credit without further collateral.  Should this be a concern of yours when deciding how and when to pay your monthly bills?

Do you expect your general contractors to manage your slow payment process or is it your expectation that your general contractors pay their trade contractors in advance of receiving their funds?  Or do you simply feel this should not be a concern of yours as the owner?

As an owner, do you agree that slow payments are a problem, or are you perfectly content with the payment process as it currently exists?

Have you considered the fact that your slow payment terms are limiting the competition and possibly causing higher pricing by the GC for your project?

Are your monthly payments made in a consistent manner, on a set date, or are they made when all your approvals are in place, regardless of timing?

Would you consider a discount offered by your general contractor if payments were processed by the tenth of each month?

For general contractors:

Why do you accept payment terms that are unworkable for your trade contractors you are asking to perform your work–is it for fear of losing this client or is it that you do not feel the payment terms are unworkable?

In your negotiations with your client, do you negotiate better payment terms, or do you accept the terms offered, regardless of how these terms may impact your trade contractors?

Are you willing to pay your trade contractors in advance of receiving funds from the owner?  If not, is this because of not having sufficient funds available or controlling your risks?

Is it your expectation that your trade contractors willingly accept the payment terms you have agreed to with your client, regardless of their ability to manage their project within these terms?

Would you be willing to offer a discount to your client if monthly payments could be made by the 10^th or the 15^th of each month?

For trade subcontractors:

Why do you accept contracts with unworkable payment terms—Is it for fear of losing the relationship with the general contractor?  Or is it that you feel you can somehow manage around the terms?

Are you willing to walk away from projects that have pay-when/if-paid clauses, especially when the starting time for paying monthly is not firmly established in the owner contract with the general contractor?

When walking away from a contract on a project, or not proposing on a project, do you clearly advise the owner and the general contractor why you will not consider working on this project?

Would you be willing to offer a discount if payments were to be made by the tenth of the month, every month, without fail?

For the leaders in our industry:

Are you satisfied with the current acceptable payment terms of our industry?

Are there efforts underway to better these terms and resolve some of the problems caused to the trade subcontractors performing the field work?

Do you get any push back from your members relating to the slow processing of payments?

Do you consider slow payments a major problem for the future of the industry?

SUMMARY AND NEXT STEPS:

The simple fix to this industry payment issue is to return to the days of old when GCs sought approval from the architect and the owner rep by the 25^th of each month, submitted their bills by the end of the month, and owners paid those bills by the tenth of the month after.  This would allow the GC to pay their trade contractors by the fifteenth or the twentieth.  Problem solved.

To get to this point, general contractors need to stand firm with owners in their contract negotiations and not relent and not accept unworkable payment practices.  They should demand payment by the tenth or fifteenth of the month, every month, without fail, or they should walk away. 

If they are unwilling to make these demands to the owner, they should accept the responsibility of finding the funds and accepting the risks of paying their trade contractors by the fifteenth of the twentieth of the month, every month, without fail.

Trade subcontractors should be clear to their general contractors that they will not accept pay-when/if-paid clauses in their contracts unless it clearly states in the owner contract that monthly payments will flow by the tenth of the month. Even then, trade contractors should not accept a paid-if-paid clause.  It is the GCs obligation by contract to pay you for your work, regardless of whether their client pays them.  Trade contractors should be willing to walk away if the general contractors will not accept their terms.

We are letting private and public owners dictate how our industry should work.  We are letting them call the shots and define our future.  Certainly, these owners have a role; it is their project and their money.  But, as representatives of our industry and as the soldiers in the field fighting the daily battles, we know better how our industry works, or doesn’t work.

We know what it takes to deliver a successful project. 

We should not fear standing up for our rights.  It is our obligation as leaders to define the terms and conditions necessary for a successful project.

To accept anything less is to accept failure for so many.