We often get asked by our clients, “What are the most common problems that contractors face?” As you could imagine, the answers are almost invariably the same, only different in the sense of how one sees them in their own organization.
In the world of construction we have many other companies and levels of service to deal with in our operations for delivering our products and services to the client. Because each one of these operate on some other rules than you do, or even that each of the others does, it becomes a challenge to make sense of.
For instance – you get a contract from a GC (general contractor) which immediately puts you in the position of sub-contractor, placing you, legally, under the control and company policies of the GC. This includes payment terms, safety programs, screening of your company or its employees, schedules, insurance requirements and anti-drug policies.
Let’s say you sign your first $100,000 contract. You have 30 days to perform your scope of work. You start out well, get all your planning done, materials ordered, personnel assigned and equipment in place. The contract says that the payment terms are based on the amount of work you complete in a 30-day period, which in this case will be your entire scope, and the GC will pay 90% of that 15 days after, and the remaining 10% 45 days after that. So, this means that you finance the entire project, without collecting one red cent, for at least 45 days.
If you usually perform this size contract this is probably OK, and you can float the expense for that time period. BUT, the fine print on that contract has this little clause that says, “the GC will only pay, provided they receive payment from their client and will not pay anybody until that occurs”. This is called a paid when paid clause and is more and more becoming a part of the contract landscape.
Here is what this means: If the GC or another sub screws up and doesn’t perform correctly or at all as part of the GC’s contract with the client, you don’t get paid even though you delivered your scope of work on time and correct. Get a couple of these going on and you can be run right out of business.
Which brings us to the #1 problem – Cash Flow. How do you operate your company when you have someone else controlling your income?
Well, all is not lost on this. Make sure you read your contract well before you sign it. If you don’t agree with a term or clause take a nice big red marker and cross it out. DO NOT make any verbal promises or agreements as this will just end up in a he-said-she-said pissing match.
The most successful method I used to handle this is when I was put into a sub position, I would submit OUR company’s contract based on sane and ethical business practices that prevented us from falling prey to the other guy. If the GC, or direct client for that matter, wouldn’t agree, then they have their own unsolved problems and have no intention of paying you for your services anyway.
In closing, I give you this: if you cannot come to terms on a contract that will be a win-win agreement, do not sign it and walk away from the job. This will be a whole lot easier and less expensive in the long run. Avoid being forced into some sort of legal battle which will drag out for years and be way more costly than just saying, “no thank you”.