Construction Business Management

Article

Getting Paid on Construction Contracts

Slow payment by owner to contractor is a source of much contractor angst, and is a significant contributor to cash-flow problems at best and bankruptcies by multiple tiers of contractors and project failure at worst.

Owner slow payment may not be eliminated but you can take steps that are sure to help. At or before signing a construction agreement, meet or talk with the project owner at the highest level possible in his organization. In the case of an individual owner establish a relationship with the owner himself. If a larger company, learn who has final check-approval authority and meet with that person. Also include in this meeting the project owner's representative your project manager will be dealing with throughout the course of the project. This way you are dealing with people with faces, not just names on a document.

In addition to signing the construction documents, a primary purpose of this meeting is for you to let it be known that you expect payments from the owner to be paid as you’ve agreed to in the construction contract. Especially on short-term projects, a commitment sealed with direct eye contact and a firm handshake is not easily forgotten and reinforces the written terms in a construction contract. The very first time a payment from the owner is late, remind him of the earlier commitment he made to you. Try to do this in a manner that does not diminish any goodwill. Knowing you will quickly call his hand will likely cause him to pay you before he pays others whom he knows are less "squeaky."

If the owner should get into a pattern of late payment, do not hesitate to talk with your construction attorney, so that you are prepared to act quickly in any circumstance. Try to avoid using the contract language that permits you to stop work except in the most extreme case, and then only in consultation with your attorney.

Be sure your project manager and bookkeeper follow the contractual requirements for applying for payment. Failure to do so may give the owner valid reason to delay payment.

Try to get to know the owner's payables clerk—an advantage when you call to ask the status of a payment you're expecting.

When the project owner is using a bank to finance a project, you should get to know the banker, who will understand that you and the bank have a mutual interest in all parties to the project getting paid. Ask the banker for a letter stating that the bank will reserve loan funds sufficient to pay you the amount of the owner-contractor contract plus a reasonable amount for possible change orders. Keep in touch with the bank officer throughout the project.

The bank may ask you to sign an agreement to complete the project if the owner defaults on his loan. If you agree to do so, you should require a provision in that agreement that the bank will pay you up to date for work you have completed at the time the bank takes over—before you are required to begin work for the bank.

At times it is necessary to place a mechanic's lien on the owner's property to improve your chances of collection from a non-paying owner. This course of action has legal implications and requires an attorney familiar with local lien statutes. Be aware of time limitations and other state law requirements for placing liens before starting a job in that state. Lien laws vary from state to state, including preconstruction notices.


The author of this article, Nick Ganaway, was a successful general contractor for 25 years. He is a consultant in Atlanta, Georgia for contractors and other small business owners. Nick has described how to set up and manage a construction business that is profitable, enjoyable, and enduring in his book Construction Business Management: What Every Construction Contractor, Builder & Subcontractor Needs to Know.


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