Why You Should Pay Your Subcontractors On Time
I’ll start this by up-ending it! Why do sub-contractors NOT get paid on time?
Well, I’ve noticed a couple, no, make that four, reasons for that. The first is actually something that has always annoyed me. The QS’s think they are being clever by hanging on to the cash themselves for a bit longer! The second is that the main contractor’s QS hasn’t got their act together by due date and told their finance people to make the payment. Third comes about when there is some dispute about who owes who how much. That leaves us with the last, which is the worst, scenario! No money in the bank to make the payment to the Subby!
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Obviously with that last one disaster loams large for everyone! This isn’t the time or place to discuss how that can be dealt with, so I’ll leave it alone. With the first couple of causes for late payment I’d give the QS a clip round the ear or send him down the road! If there is a dispute about the value of the payment, well good sense dictates that answer to that would be to make a partial payment and argue about the balance at leisure.
So why should you pay your Sub-Contractors on time? In the final analysis that comes down to one thing: Money!
I’ve never come across any construction company, Main or Sub-Contractor, that had £££ Millions stashed away in their bank accounts just to dip into on a rainy day. For all of them the critical factor is Cash Flow. The Client pays the Main Contractor; they pay the Sub-Contractor. Everyone should be happy! However, when it doesn’t happen that way, problems can crop up!
As a rule of thumb most construction contracts are taken on prices which allow pretty low margins of profit. Most construction companies have arrangements with their banks which give them overdraft facilities so they can operate on borrowed money, but only up to a pre-arranged limit, and only for limited time periods. The smaller the company, the lower its historical annual turnover and the lower the borrowing limit and they are perceived as a bigger risk than the bigger companies.
So what I have seen happen so often is that the Sub-Contractor isn’t paid on time and the bank pulls the plug and they go bust! On the face of it that shouldn’t be any serious problem to the Main Contractor. The Subby’s Administrator will be after them for the cash they reckon is owed, but there will be months to find the money to pay! Great! Except that what happens next isn’t!
First thing is that the skilled trades employed by the Sub-Contractor sniff the breeze and realise they are likely to be out of a job. The standards of workmanship go right down and there can even be deliberate sabotage that is hard to spot. They are out of a job and work on that Sub-Contractors package stops. Suddenly the Main Contractor is going berserk looking to place the work with another Subby! Now those companies approached aren’t idiots! Amongst their Management there is someone with a business head on their shoulders! They know the situation and they are after a profit for their employer. They milk it!
A project I worked on, in a turnaround role, had a price for the full package from the original Subby of £240,000 of which they had been paid about half.They weren’t paid on time; they went bankrupt. The replacement Sub-Contractor, appointed, the one with the lowest tender, got what remained of the package for £350,000! To put right the defective work done by the previous disgruntled tradesmen cost another £35,000 and took 3 weeks to sort out. It was at that point, when the new Sub-Contractor started on site, that I walked on to the job. By that time it was running 4 weeks behind programme, which was down to not having a Sub-Contractor for one of the work packages!
The project was handed over to the Client just a little late, about 3 days, but, because of the relationship we struck up and their needs for the premises,Plus the fact that the Main Contractor was simultaneously working on another project for them and they didn’t want to put them out of business, too, nobody had to shell out for LAD. However, that bit is unusual; don’t expect it as a generality!
So that’s pretty well a story of why you should pay your Sub-Contractors on time. It costs a bomb to replace them if they go bust. The extra cost for that work package in this instance was £285,000 plus whatever the Administrators eventually settled for. The Main Contractor could also have faced LAD and the Sub-Contractor who caused the Delay wasn’t around to pick that bill up. As it was they made a hefty loss on that project!
The irony is the Main Contractor did have the cash available to have paid the Sub-Contractor on time. By being what they thought was clever and putting it off for maybe a week they shot themselves in the foot. There was some justice in it, though. The extra costs they picked on this job saw them go bankrupt six months later!
Convinced now as to Why you should pay your Subcontractors on time?