it is hard for many people in non-construction based businesses to understand the challenges that most subcontractors face in financing their businesses. Where most of business is conducted on a point of sale or 30 day term basis, that is not the case for most commercial and industrial construction businesses.
Subcontractors are the companies hired by a General Contractor to complete each specialized area of work on a construction project. While there are contracts that protect both parties in this arrangement, a subcontractor is usually responsible for providing both materials and labor to perform their scope of work and that adds an extra layer of challenges when it comes to financing a project. Most construction projects can take months and even years to to complete while many subcontractors are only on a project for weeks or days which can lead to their profits being tied up for an extended time period. Most contracts today required the General Contractor to hold a “retainage” until the entire project is accepted and complete. In many cases this money is not received for a year or more after the original billing; this can mean that a subcontractors profits can be held for over a year.
I have outlined the payment process in other blog posts, but the “payment Gap” that seeks to destroy subcontractors is the most difficult obstacle to overcome. This obstacle starts with a monthly billing period and extended payment terms based on owner approved payment applications and then progresses to retainages held and warranty periods. As explained in some of my other blog posts, the billing and payment process is quite confusing and difficult to master, but the most difficult thing is the “gap” between the receivables on a project and the payables. ( billing -resinadviser ) . While some suppliers will allow for extended payment terms and joint check agreements, most suppliers put their contractors on 30 day terms. When a subcontractor bills according to contact documents, payment on projects can take 45-90 days in the best case scenarios. This difference in receivables and payables is what I call the “Payment Gap”.
This gap is not exclusive to the subcontractor, contractor relationship; the gap exists between resin manufactures and their suppliers as well. Many material suppliers are held hostage to raw material suppliers who change their prices based on market price and demand rather than long term contracts. They are also plagued with shortages and inconsistencies that have to be dealt with before the product is shipped to its destination.
In Short, there are many hurdles that have to be jumped over before a resinous project can be installed, and even more before it is paid. It is very difficult for a company to overcome the “payment gap” and achieve financial stability. Success is measured by getting 90 days ahead of your money and staying that way even when there are inconsistencies in schedules and billed work.
Moral: If you are a contractor, do not get over extended and always communicate your payment concerns with both your General Contractor and your Supplier. It is better for everyone involved to be aware of the payment terms. Always stay 90 days ahead, and watch billings to project what payments will look line down the line. Plan ahead so that you can manage any surprises. Ultimately, there should be more advocacy for 30 day payment terms for subcontract work (especially materials and direct labor) with protections for the owner and General Contractor; most projects are bank funded and the funds are readily available before the project begins. By working together, this problem can be ultimately solved.
Resin Adviser 
Leave a comment