“Revenue is vanity, profit is sanity, but cash is king.” - Unknown (popularized by Volvo CEO Pehr G. Gyllenhammar)
Getting paid promptly can be the difference between a “successful” project and a project that zaps your cash flow. What steps can you take to ensure prompt payment to protect your cash flow?
First, insist on terms in your contract that require payment in a timely manner based on clear procedures for payment applications. Some important terms you should include are:
A guarantee that you will be paid the value of any work that isn't in dispute. Example: “In the event of a disagreement related to the percentage of completion of work performed or the value or time extension for extra or changed work, Contractor [Subcontractor] shall be paid all amounts not subject to a good faith dispute pending resolution.”
Prompt notice to you for reasons why any amount will be withheld.
Example written for Owner – Contractor Contracts [or Contractor – Subcontractor Subcontracts]: “Owner [Contractor] shall not withhold any payment in whole or in part from Contractor [Subcontractor] unless Owner [Contractor] provided written notice to Contractor [Subcontractor] of Owner’s [Contractor’s] intent to withhold such payment, with the reasons therefore, within ten (10) days of Contractor’s [Subcontractor’s] submission of its invoice or applicable for payment.”
As a subcontractor, the maximum time you must wait if the owner doesn’t pay the contractor and it’s not your fault.
Example: “Notwithstanding the foregoing or any provision to the contrary, in the event payment is delayed to Contractor, payment to Subcontractor shall be made no later than 90 days after Subcontractor submits its billing to Contractor, except to the extent Contractor is not receiving payment due to Subcontractor’s failure to comply with the terms of the Subcontract.”
Another key provision to negotiate is one that gives you the power to suspend your work if you are not getting paid. This is important because if you don’t have this provision in the contract, you risk being in breach of your contract if you decide to walk off the project because are not getting paid. Wait – what? How can not getting paid turn into you being in breach?
Just because your payment is late, it may not be considered by a court to be such a significant breach to justify the extreme repercussion of you suspending your work. It all depends on the value of the contract, how much is owed, and how late the payment is. There is no set rule for figuring this out.
For example, if your subcontract is worth $1,200,000, and about halfway through the project, the Contractor is 30 days late on a progress payment worth $50,000, but you have already been paid $700,000 to-date, what you are currently owed may or may not be a significant enough amount of money to justify your walking off the project. But, if you have an express contract term that allows you to stop work if your payment is late, then you can suspend your work without having to analyze the risk of whether or not that late payment would be considered a significant (or “material”) breach justifying the right to stop work.
An example of a good provision to include is as follows: “Should Contractor fail to make payment per the times set forth herein, Subcontractor may suspend work after a 30-day written notice to Contractor until such amounts are paid.”
Once the project is underway, make sure you understand which “lien” right may get you paid the fastest. Most everyone has heard of a mechanic’s lien, and there is no denying that a mechanics lien is a powerful tool for getting paid. But, procedurally, it’s often not very useful or appropriate for expediting timely payments during the course of construction. Unless a property owner needs to clear title to its property for refinancing or selling, the mechanics’ lien procedure may not help you get paid promptly or inexpensively. Here’s why:
As a contractor you can’t record a mechanic’s lien until your work is completed or has ceased. So, you can’t use a mechanic’s lien to enforce progress payments while you are still actively providing work under your contract.
You must give proper notice of the lien and then record the lien with the county recorder’s office in the county in which the project is located. While this is not a huge cost, the process can be cumbersome. Next, and this is often misunderstood, you must file a lawsuit in Superior Court to perfect (or foreclose) your lien within 90 days of recording your lien otherwise the lien is null and void.
So, relying only on your mechanics’ lien rights may not get you paid promptly, could get expensive (attorney fees and court costs), and cannot even be pursued while you are still performing work on the project.
On the other hand, California is one of the few states that allow a subcontractor (or supplier) who hasn’t been paid to serve a Stop Payment Notice at any time during the course of construction – you don’t have to wait until your work is completed. And, the earlier the better if the contractor is playing games with your payments. Presuming you followed the proper preliminary notice requirements as applicable, all that is required of you is to send a letter that you should title “Stop Payment Notice” via certified mail to the owner and contractor (and lender if any) that includes a general description of work to be provided, and an estimate of the total amount in value of the work to be provided, and the amount being claimed, which may only include the amount currently due for work provided through the date of the notice.
Serving a proper Stop Payment Notice requires the owner to hold back the amount of your claim until you release it. Stopping the flow of money to the general contractor is usually a sure-fire way to get the payment issue elevated quickly to the level needed to get it resolved!
As a good businessperson, you always want to make sure the project is profitable for you, but more importantly, do everything you can to ensure your cash flow remains strong. Don’t let the owner’s (or your customer’s) cash flow problems become your cash flow problems!
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