Saturday, November 01, 2014

How to Get Paid When You’re a General Contractor

Image courtesy of satit_srihin at FreeDigitalPhotos.net

The #1 complaint that I hear from contractors is that they have trouble getting paid.  They provide a service to an owner, do additional work when asked, and then when an owner is presented with a bill, the owner ignores it, pays less than asked or refuses to pay at all.  What is a contractor to do?

Here are the rules for getting paid:
  1. Start with a good payment schedule. The payments should be linked to milestones so the work does not get ahead of the payments or vice-versa.  Ask for payment at the start of a milestone to ensure reasonable cash flow.  For example: 10% at the start of plumbing.
  2. Ask for a reasonable deposit. Make it enough money to ensure payment for custom materials and make it non-refundable.  If you are a home improvement contractor in Massachusetts, the deposit cannot be more than one-third, and you have to include language in your contract stating that fact.
  3. Include a provision in your contract that allows you to stop work or suspend the job if a payment is not made when due. For that reason, make sure that the payment schedule is broken down into more frequent payments.  That way, if one is missed, it will only constitute a small percentage of the job.
  4. Charge finance charges. As long as your state allows you to do so, charge finance charges for late payments. You can also include a discount for immediate payment if you would like.
  5. Include a provision in your contract that entitles you to attorney’s fees and all costs of collection. In Massachusetts, you can’t get your attorney’s fees back if you don’t include a clause in your contract saying that you have a right to them if you have to pursue a customer for payment.
  6. Consider having a “pay when paid” clause with your contractors. Unless you are working on a commercial job in MA that is >$3,000.000.00, you have a right to wait to pay your subcontractors until you are paid.  This may not be great for your relationship with your subs, but it will put pressure on the owner to pay you.
  7. Insist that all change orders are in writing and reflect the change in contract price. In addition, indicate in your contract when payments are due for change orders.  Then, do not make any additions to projects without written change orders!
  8. State in your contract who will have the authority to sign change orders. If the owner asks others for change orders, make sure the owner understands that he will have to pay for all unauthorized change orders.
  9. Invoice on a regular basis and keep proper accounting of your job.  Guess how many owners are willing to pay for change orders that a general contractor discovers after final payment has been made.
  10. Finally, if all else fails, make sure you are in compliance with the timing of your state’s law for filing mechanic’s liens. Mechanic’s liens are an excellent tool for getting paid, but the rules for filing them are usually very specific, so consider hiring an attorney so they are done properly.
Next up:  How Subcontractors Can Make Sure They Get Paid.