The ASA Metro Washington Chapter joined forces with the National Association of Minority Contractors, DMV (District/Maryland/Virginia) Chapter and the Metro DC Hispanic Contractors Association to formulate a short paper that explains the issues and what can be done.
Subcontractors in the construction industry are often expected to shoulder the financial burden of construction projects, acting as de facto financiers for owners and developers. This unsustainable payment system is particularly harmful to emerging companies striving for growth and success. The inherent inequities of the current system risk forcing many construction subcontractors out of business.
To safeguard the future of the DMV construction industry, it’s imperative to address potential barriers that hinder the success of all subcontractors, but particularly emerging small businesses, as well as minority, women, and disadvantaged businesses (MWDBEs) on future projects.
The 2023 Disparity Study commissioned by DC Mayor Muriel Bowser explained in its findings that DC’s Quick Payment Act does not do enough to protect people of color or women-owned businesses that are construction subcontractors. The study recommends that DC, as an Owner, “should consider establishing [a] prompt payment process to ensure timely payment from prime contractors to subcontractors and suppliers, ideally within a specified maximum number of days after approving invoices.”
Owners are the key to addressing this issue. The owner must take responsibility to ensure the success of any project that requires a percentage of work to be performed by small, minority, women, or similar businesses. Too often, owners delegate this responsibility to the general contractor without active involvement. Owners must realize their future projects will only be built if a growing population of subcontractors bid on their work. Fledgling businesses cannot survive the unreasonable payment process in commercial construction. A public or private owner who sets aside work for MWDBEs must accept part of the responsibility for prompt payment to those businesses doing the work.
The Subcontractor Coalition presents the following specific concerns and recommendations:
CASH FLOW is the number one concern affecting small businesses. Small, particularly women and minority subcontractors, are expected to finance construction projects. This fact is one of the primary barriers to subcontractor success. For example, a subcontractor who performs base contract work the first week of December typically does not see payment until the end of January or the beginning of February. And if that subcontractor is second-tier, then one to two weeks are added to the duration. If the costs expended the first week of December, for example, are for a “price and proceed” change order, then payment would not be received until eight weeks after the cost proposal is submitted, approved, formally issued, signed, and billed – many months after the work is performed. Construction Owners can improve the cash flow of small businesses in the following ways:
- Pay the general contractor seven days after a complete requisition is submitted. Require the general contractor to pay subcontractors in seven days. Post on a public website all payments to the general contractor. Include on that website the owner’s contact, a phone number for subs to call in the event the general contractor does not resolve payment issues in a timely manner as specified in the contract. Also include on the website a copy of the prime contract payment bond. General contractors who do not pay timely should be assessed a penalty.
- Owners need to manage the change order process with the same intensity as the overall project schedule. It is too easy for all parties to procrastinate pricing, approving, and processing change orders. Demand accurate and detailed proposals in 10 days or as specified in mutually agreed upon terms in the subcontract. Review and approve proposals within seven days. Then issue the formal change order in three days. The owner who pays changes timely will be an owner of choice.
RETENTION is a tremendous burden to small, minority and disadvantaged subcontractors. Owners often hold 10 percent retainage on subcontractors until the project is completed. This is not fair to subcontractors and is not a reasonable way to ensure a project is completed. This coalition is ready to take the lead in ENDING RETAINAGE as it is now and replacing it with a system that protects the owners’ interest and also ensures timely payment to subcontractors after their work is completed and properly invoiced.
One suggestion is: If a project requires a subcontractor to provide a payment and performance bond, then there will be no retainage on the project.
Another consideration is if a subcontractor’s work has been accepted, then payment of retainage will be made in 30 days. Subcontractors have waited years for retainage to be paid and this must stop.
CHANGE ORDER MARK-UPS need to reflect the reality of small businesses. The smaller the business the higher the overhead. A typical small business subcontractor has an overhead of 20%, a typical large subcontractor has an overhead of 12%, a typical mid-sized local general contractor has an overhead of 7.5%, and a typical national general contractor has an overhead of 4%. A reasonable profit margin on change orders is 10%, and more than that if the changes take a long time to process.
