April PAY!
PAYMENT TIMING
PROGRESS PAYMENTS: Time Is Not On Your Side
Cash flow. No two words are more important to
subcontractors. Progress payments are the monthly lifeline that
subcontractors depend upon to provide the funds to pay employees,
suppliers and sub-subcontractors, and fund other essential business
functions. Unfortunately, many subcontractors have learned the hard
way that this lifeline can also be a vulnerability when customers'
payments are improperly delayed. The secrete 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 its 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, just as
often payments are 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 circumstances; others are chronic later payers; and
then there's everyone in between.
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 are a creditor. (Surprise!) You are a creditor
because your work is performed 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 you bid on use of a document
such as the American Institute of Architects (AIA) 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
collections 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, including interest, de- and re-mobilization
costs, as well as 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 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 (PAY!) Web page at www.asaonline.com/pay.htm
contains many more ideas and payment resources.
Click here for PAY!
Quick Primer on Payment Timing
(c) 2003 American Subcontractors Association, Inc. ASA
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