Subcontractor Payment Terms in Commercial Work

Getting paid when you're low down on the food change can be a frustrating hassle and a runaround. Here's some general advice and a few relevant anecdotes. July 12, 2012

Iím looking for some feedback on some typical subcontractor payment terms. As a subcontractor do you receive a deposit upfront? What are the usual terms for final payment upon job completion? Payment when services completed? Is there net 30 days? Whatís the payment when the contractor gets paid?

Forum Responses
(Business and Management Forum)
From contributor B:
For residential work: Jobs under $20,000 we receive half at start up and the balance at completion. Jobs over $20,000 we receive 1/3 at start up, 1/3 when cabinet boxes are set, and balance at completion. Any add-on work is paid at the end of the job also. We will not cut any material until a deposit has been paid Ė no exceptions!

From the original questioner:
Do you ever hire a subcontractor to do work for you on a job? Say you hired an outside shop to make cabinet doors for your $20,000.00 job. What would the terms be for paying the subcontractor? Would there be a difference between a commercial job vs. a residential job?

From contributor B:
We use an outside source for doors. The doors are paid for by the tenth of the month like any other bills. That is what the deposit is used for. We do no commercial work.

From the original questioner:
Contributor B - thatís what I expected. You pay for the doors like a net 30 to the door manufacture weather or not your part of the job is done.

I'm just looking for typical payment contracts for subcontractors for commercial jobs. If I had a $20k plus job say for a hospital to do cabinets I would hire another company as a subcontractor to do the doors to the cabinets. What are the standard or typical payment processes that would be in a contract agreement for the subcontractor? Does the subcontractor get a deposit? When does the subcontractor get his final payment? Is the final payment when he completes and delivers the doors to me? Is it a net 30 from when he delivers the doors? Does the subcontract have to wait till the entire job is complete to get paid? I get paid then the subcontractor gets paid? I'd just like to know what the average fair business practice is.

From contributor B:
The last, and I mean the last commercial job we did was a small remodel job at local county court house. It was only about a $3,500 job. I did not require a deposit since it was so small and being a local county job. After completion, I submitted the invoice to the contractor. After 45 days, I called to inquire about the delay of payment. Was told by the contractor that they pay no invoices until they receive money from the customer for work done. Basically they were using the subcontractors to finance their daily business. Four months later I received payment with the contractor holding 10% until the project was completed. It took almost eight months to receive the final payment. That is why we do no commercial work.

From the original questioner:
I've heard that story too many times on commercial jobs. The commercial jobs are good money and they want everything yesterday but when it comes time to pay up itís like pulling teeth to get paid.

From contributor M:
It sounds to me like you want your suppliers to wait for payment in that you are considering a supplier (dedicated door manufacturer) as a subcontractor. I am not sure how well most suppliers would take to that but taken to an extreme your sheet goods vendor, finish vendor, counter top fabricator, they all could be considered subcontractors? What would be the threshold for not considering a supplier a sub?

We simply consider everything that goes into the product we are supplying as supplies. What our terms are with each supplier are different for each. Some are net 30, some net 10, and some we pay C.O.D., but none receive payment based on our progress payments.
I canít think of a time that it happened but I guess if we were subbing for another contractor and part of our project scope involved another trade (say an electrician who was working under us) we would simply negotiate terms with that individual. The terms would likely be based on the size of the project and would fall under something similar to what has already been posted here, 1/3-1/3-1/3 for large, perhaps 1/2-1/4-1/4 for a high material cost, or small jobs may just be paid when they complete their end. We of course would have to cover that amount as a part of our terms with the general.

From the original questioner:
Thank you for your reply. It was exactly what I was expecting to hear. As for what I was asking I'm not putting anyone in a situation. Everything mentioned has been hypothetical and I was looking for how other business conduct themselves. A job that I have been working on has me acting as the subcontractor to the lead contractor making them products that they don't have the capabilities to produce - all for an end client who is commercial franchise. Unfortunately I'm in dispute with the lead contractor over payments.

It started as a one small job that turned into a fast growing ongoing contract which is still on going. It is good work, especially in this economy. Unfortunately due to speed that the jobs are coming no formal written contract was produced, only verbal understandings that are far from understood as of now.

The job went from a deposit and paying a net 10, to no deposit, and net 30, to now no deposit ďwe'll pay you when we get paid.Ē which is up to seven weeks now. This is the first time I've been put in this type of situation and I was just wondering how other businesses operated so I can prepare my case.

From contributor C:
Stop working with them today. You should not be working with them without a contract - period. I do have some GC's that can hold out on me for up to 60 days, but I know when it's coming. Another thing, when you do step into more commercial work, you will be asked for shop submittals, bill for them when approved and send in a request for a material draw. Do not ask for a deposit.

There is a lot of misinformation on GC's. The good ones are paperwork driven with contracts and change orders. They withhold money and payment for the sub's that don't submit the right documentation such as prevailing wage reports and proof of payroll. Commercial work is very lucrative and pays well, you just need to learn the business side of it.

From contributor M:
I agree with Contributor C. Regardless of the times itís time to get a contract and not produce any more work until that is complete. You will quickly find out if they really like your work or they are simply happy to be dealing with someone who will wait seven weeks (or possibly longer) for payment while still providing product. If they are very pleased with your work it would seem you would be able to easily get a contract with payment terms acceptable to both parties. If they balk then bail and be happy you didnít get soaked for more down the road.

From contributor C:
Sometimes the invoice you send can get rat holed on a desk of a busy pm and like anyone, they try and hide the fact they screwed up and didn't turn it in. I would tell them you need money to operate, period. Don't threaten just let them know you are struggling. Believe me, they understand. I recommend telling them that you are tapped out and cannot possibly deliver on time, it's just economics. If they value you a hand written check will be available. Absolutely do not threaten, you just are down to the last dime and it's hard to operate without money.

We honestly will not start a job without a contract or purchase order and I don't care how big the job is. I turn in the shop drawings, and bill for them. I send an invoice and a G702 and 703 AIA documents and ask for a material draw. It's important to note that you will most likely have to name them as a loss payee insurance wise, make darn sure your agent has sent them a certificate of insurance and workerís comp.

Whatever you do, contract or no contract, document in a daily diary of what you did or get a file going and have a daily contact sheet that plainly details what you and the client talked about and what was agreed upon. Some GC's are not snakes, but the lowest bidders will get money out of you to make up for their low bids. Remember this, you are one of the last one's in and it is imperative they pay you and they know it.

From the original questioner:
Thanks for the feedback from everyone Ė itís all been helpful. This has been a big learning lesson for me and the lead contractor on these jobs as well. He is very green to this. He went fishing and reeled in more than he could handle.

I had a serious meeting with him this afternoon. He showed up with more work for me and a check in hand to cover 70% of what he owed and assured me that the balance would be taken care of by next week, explaining that the client is way behind on their payment so I will wait and see.

We had an understanding and agreed on a contract with a payment schedule. 50% down at the start and the remainder a net 30 when services are completed, with assurance of plenty more work. For a small new business he is doing a heck of a job pulling in work. It has been keeping me working for six months which looks like it will continue on through the next year.

Unfortunately the client has not paid him for ten weeks now. Itís a very tricky business when dealing with these big corporations. They keep giving you work yet they are slow on paying. If you piss them of this early in the game they could just go somewhere else. He is trying to land a long term contract with them, and which he wants with me. I guess what I've learned is no matter how small the job you should always have a contract of some sort that way all parties involved understand each other. I will just wait and see if they follow through on our agreement.