By Patrick Hogan, handle.com
Late payments can create a ripple effect of negative consequences for subcontractors on construction projects, including cash flow struggles and potential legal disputes. As a subcontractor, you need a clear understanding of how late payments can affect construction claims.
The construction sector is steadily growing, yet more than half of subcontractors made less profit because of the rising costs of labor and materials. This makes it even more important for subcontractors to run a tight financial ship, and prevent holes like delays and disputes from eating more into earnings.
Here are some outcomes you want to avoid
Cash flow issues
Late payments from clients can cause subcontractors to struggle with cash flow, resulting in difficulties in meeting financial commitments and potentially jeopardizing their ability to deliver quality work on time. As a consequence, the ripple effect of delayed payments can hinder the smooth operation of the entire project, impeding the progress and causing frustration among all stakeholders involved.
In a construction project, picture a subcontractor responsible for electrical installations. If the main contractor consistently pays them late, it creates a cash flow crunch, making it tough for the subcontractor to buy materials and pay their electricians on time. This inevitably delays electrical work, disrupting the progress of the entire project.
Increased costs
When subcontractors experience delays in receiving payment, they may incur additional costs such as interest on loans or credit, bank overdraft fees, and late payment penalties. These extra expenses eat into already thin profit margins and hinders the financial stability of subcontractors.
Strained Relationships
Late payments strain relationships between subcontractors and general contractors or project owners. The subcontractor’s ability to deliver quality work and maintain a positive working relationship may be compromised if they constantly struggle with financial challenges caused by late payments.
Picture a general contractor who hires an electrician for a big project. The contractor keeps putting off the payments, and the electrician starts to struggle with money. He can’t pay his workers or buy the right materials on time anymore. Because the electrician can’t do his job on schedule, the whole project gets delayed. Eventually, things get so bad that the electrician and the contractor end up in a legal battle. Their working relationship takes a hit, and they both lose money and stain their reputations.
This case emphasizes the domino effect of late payments, and how it can escalate from a financial issue to a legal dispute, straining or even breaking professional relationships in the process.
The Toll of Late Payments: Rise in Claims
Non-payment Risk Soars
Constant late or missed payments in construction can push subcontractors to claim compensation. This step spikes the chance of legal fights and financial losses. Last year, the construction industry witnessed a surge with a 53% increase in the total number of late payments for wages and invoices, of which a significant number of subcontractors were affected.
Work Output Takes a Hit
Delayed payments force subcontractors to pull their resources and focus off their projects. This switch leads to lowered work output, project hold-ups, and sparks off claims from other project members. Findings reveal that in 2022, roughly nearly half of subcontractors, specifically 49%, experienced delays of 30 days or longer before receiving their payments, slowing down projects.
Contracts Get Broken
If payment timelines are clearly marked out, delays can mean a contract break. In such cases, subcontractors can file a legal claim for compensation for the financial hurt caused by late payments. Picture a scenario where a contractor doesn’t pay within the agreed 30-day term, pushing the subcontractor to claim a contract break.
Proactive Measures for Subcontractors
Lay Down Payment Rules
Before signing any contract, subcontractors need to lay down clear payment terms. This includes deadlines, how to invoice, and what happens if payments are late. Think of a subcontractor making sure the contract specifies a 5% late fee for overdue payments.
Safeguard Your Lien Rights
To protect payments, it’s essential that subcontractors safeguard their lien rights. Automating the process of filing pre-lien notices can help achieve this. It eliminates the risk of missed deadlines and errors that could result in a loss of the right to file a mechanic’s lien. An automated system offers peace of mind by ensuring all the necessary steps are taken to protect your lien rights.
Keep Tabs on Payments
It’s key for subcontractors to keep a close watch on their payments. They need to act fast if any payments are late or missing. Doing this helps lessen the hurt caused by late payments. To help with this, subcontractors can set up a regular time to look over payments each week. This way, they can spot any problems early on and sort them out quickly. Using tech tools that track payments in real time can also help. These tools give instant updates and alerts for any problems. With tech on their side, subcontractors can make sure they stay on top of everything without the headache.
Keep Detailed Records
Subcontractors need to keep a full record of all project-related paperwork. These records give crucial evidence in any construction claim and back up the subcontractor’s case in disputes. For instance, if a subcontractor faces a non-payment issue, detailed work logs, change orders, and email chats can serve as strong evidence during dispute talks. Contractors who keep detailed records resolve disputes more effectively than those who don’t, which can put their entire claim at risk.
Late payments in construction can bring serious trouble for subcontractors. But, by understanding these effects and taking proactive steps, subcontractors can keep their interests safe in construction projects.
About the Author:
Patrick Hogan is the CEO of Handle.com, where they build software that helps contractors and material suppliers with lien management and payment compliance. The biggest names in construction use Handle on a daily basis to save time and money while improving efficiency.
