Contract Provisions That Affect Cash Flow

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If you tend to skim or skip reading contracts altogether, you need to listen to this episode. Rob, Wade and Stephen discuss the various provisions that can have sometimes catastrophic effects on your cash flow.

We discuss why it’s important to pay attention to the terms of the contract, which provisions have the most impact on cash flow, and what can happen if you’re not familiar with the payment terms or other provisions.

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Rob Williams, Profit Strategist |
Wade Carpenter, CPA, CGMA |
Stephen Brown, Bonding Expert |


Rob Williams: [00:00:00] Welcome to the Contractor Success Forum. So today I am Rob Williams with IronGate Entrepreneurial Support Systems, driving profit in your business. And next is…

Stephen Brown: [00:00:18] Stephen Brown. We figure out innovative ways to solve your bond problems.

Wade Carpenter: [00:00:23] And I’m Wade Carpenter. And I help contractors nationwide to build permanent profit in their business.

Rob Williams: [00:00:29] All right. And today we’re talking about the top five ways to improve your cash flow. Why is that important to us? Why is it important to improve your cash flow? What do you think, Wade? Why do your guys need to get-

Wade Carpenter: [00:00:44] Well, I mean, I think the focus today is contract provisions that affect the cash flow, and a lot of people never read their contract and they end up getting burned. And if they got a new general contractor they’re working for, or an owner, they’re working for a lot of times, it can come back to bite them.

Rob Williams: [00:01:02] All right. And Stephen, why do we need these contract provisions as a bond agent to improve our cash flow?

Stephen Brown: [00:01:10] Well, the bond is tied directly to the contract. It guarantees what the contract says. So understanding what the contract says and communicating to your owner in your initial meeting: look, these are the payment terms of the contract as I understand them. If you do what the contract says, we’ll get your project done the way you want it, but I’ve got to get that cash in because we have a lot of expenses to get this job done for you. And I’m not financing it. I’m building it.

Rob Williams: [00:01:42] Yep. Those payment terms, which just like you said, that’s our first topic today. I know coming from residential to commercial for me, that was a big difference. And I don’t think I had all that stuff spelled out. Wade, in doing your job cost accounting and handling those guys, tell me a little bit about what’s important about these payment terms that you’ve seen.

Wade Carpenter: [00:02:04] Well, I’ve seen a lot of contractors that kind of get burned. They just don’t read the contract or they don’t know the general and they have a specific: you got to turn your pay app in by the 25th of the month to get paid on time. Otherwise, if you don’t do it or don’t do it on their form or follow their directions, you can get stuck waiting another month to get that payment.

Rob Williams: [00:02:28] Oh yeah. I know when I had those framing crews and we were doing residential, we always got paid every other Friday, or maybe every Friday. Or we went to do some military projects and some other things and there were provisions in there, I think some of my stuff I didn’t get paid for a year and I was not expecting that! There were little clauses that, parts of it, I got paid when the houses were finished and some of them didn’t finish for a long time. And then that really threw me for a loop. And I was not planning on that. What are some of the crazy things you guys have seen?

Stephen Brown: [00:03:03] Well, same thing, as a frustration of not understanding why you’re not getting paid. And  the designer that may oversee the progress payment request to the owner has to say, we chose you as our builder. Certainly you can read and understand the contract and our terms, and then contractors can say they’re not abiding by the terms of the contract.

And that’s when we say, Hey, send them a non-payment notice. You’ve done everything according to the contract. Get on notice that you aren’t paid. That’s a key element of it.

And Rob, the next item is retainage. Retainage is money held out at the end of the contract. We don’t see as much of that as we used to. It used to be 10%, but why make a contractor get a bond and then withhold another five or 10% out? It’s kind of belittling, I think. But at the same time, when you’ve got all your profit, possibly tied up into retainage on a large project and you’re not a hundred percent sure when you’re going to get it. Those contract provisions can be kind of confusing. So, we always say, try to negotiate that retainage out or down before you sign the contract.

Rob Williams: [00:04:14] Yeah, I know that retainage, that same job I was just talking about, I believe let’s just say it was 10%. I don’t remember what that was. A lot of the contractors that I talked to, they just said, well, just plan for that to be a bonus if you ever get it. Some of the smaller contractors just don’t even put that in there; it’s more like a Christmas bonus, which I don’t think a lot of people are in the position to be able to do that.

But in addition to that, that last draw was maybe 20 something percent. I believe it was maybe 25%. So I had 35%, hanging out there for a year or so in those situations. But that retainage from the smaller contractors, I guess I’ll call it a sub contractor, they often have a different view of what that retainage is. Wade, what do you see in there? The general contractor, that may be his whole profit. So I guess they’re really counting on getting it where some of these smaller guys that don’t have an office that don’t even, they don’t even know what is out there in retainage. They’re not keeping up with it and they just get a check if it comes. I was kind of surprised by that.

Wade Carpenter: [00:05:23] Right. I mean, I, I see, as far as talking about your contract provisions, I think there’s definitely a place to negotiate that. I mean, if they want the best price, you can use that as a negotiating tool and even  if you start out at 10 and at some point in the contract, maybe you drop to five or, maybe we drop it out.

Some of the contractors, like the ones that are starting the job, like the grading and the concrete guys, they did most of their work up front. There’s no reason they should be waiting till the end of the project to get their retainage. And, I know sometimes like they use retainage as kind of  making sure their punch list things get done, but  when it’s something like, something that’s done up front, there’s no reason you should have to hold on to that. And so it’s a key provision that if you can talk to the owner or talk to the general contractor that you’re working for, it can be a key cashflow component. So.

Stephen Brown: [00:06:17] Yeah. I don’t know how things got to the point the contractors have to tiptoe around getting paid. So much is involved with that including a paid when paid provision in the contract.

So, cashflow is a depressing thing to talk about. What are you signing away when you sign that contract? And what do you have to sign, and you don’t have to sign? What’s normal, what are you willing to put up with? Well, whatever you sign, the one thing that you can always enforce is the terms of the contract. And you’ve got to enforce those exactly. That’s a point that I’ve heard a lot of my customers discuss. And the paid is paid provision: is this a subcontractor? You’re going to get paid when the general contractor gets paid. And if it’s not government work or you haven’t worked with that general contractor before, you don’t know the terms of their payment plan with the owner. So you’re financing it and you’ve got to price it accordingly, including the money, the cost to borrow money if you need to keep the job going.

Rob Williams: [00:07:21] Yeah. An example of that paid when paid: the contractor that I was working for was building these houses for rent. And the owner had a clause in there that he didn’t pay that last draw until they were finished. So these projects weren’t renting very well, so he didn’t put the carpets in. So technically they weren’t finished. So that went on for a year, so I didn’t get paid. And this was a whole group of subcontractors that were normally residential doing a commercial job, so nobody really knew the provisions in here, so those guys from out of town really put one over on us, I feel like. Hanging us out for a year by just not putting the carpet in the thing.

So technically they, I guess they were within their legal rights. So we just sat on it for a long time. And finally they paid us. We never brought lawyers in or anything, but that can be pretty scary to your cashflow. And it was during 2009 when we were all hurting and it really hurt. It hurt badly.

Wade, any kind of paid when paid stories for you?

Wade Carpenter: [00:08:30] I mean, I see that all the time and, going along with what you were talking about, I had a general contractor doing a gym up in Nashville right as COVID started. He had probably about 400,000 or 500,000 that was sitting there, owed to him. He was really done with it. And the contract said, we don’t have to pay you until we get the CO. They couldn’t get the CO until they put the equipment in there. So essentially that actually took out that general contractor. And, I know that’s different, really different from pay when paid, but you’ve got to watch these contract provisions and maybe you should have something in there where you have a right to work stoppage if you don’t get paid, you get so far behind.

Rob Williams: [00:09:16] Right. And thinking about it because the situation that I was in, we never were considering it because everybody was rush, rush, rush. How fast can we do it? So in our mind, we weren’t even thinking about the possibility that it wouldn’t be completed because the whole topic was how fast can you get these 60 houses up and move these people in? Because we got this long waiting list that apparently wasn’t, as long as we thought, so. That’s so interesting. Um, So now going on to the next topic is liquidated damages and work stoppage. So tell us, tell me a little bit about that. Who wants to start there, Stephen?

Stephen Brown: [00:09:55] Well, work stoppage. When jobs start and stop and start and stop, especially sometimes, say you’re out on the military base and you don’t know whether there’s going to be a security shutdown, but you’ve got to bear those costs. You got to plan for those costs. And then at what point, when you’re not getting paid according to the contract provisions, do you stop working on the project as well? In order to put your foot down and say, you’re not paying me according to contract, so I’m not going to continue to build. That’s a powerful way to get paid when you’re getting jerked around.

And then finally, the liquidated damage provisions can always be negotiated at the end of the contract. If you’re late, and they are hitting you with liquidated damages. I had a project that had liquidated damages of $25,000 a day. And my contractors were saying, well, we’ve bidded some days for liquidated damages and it was a situation where the job was very dependent on the project being finished on time, if not early, because it affected a lot of other businesses.

Well, anyway, that liquidated damage provision turned into 60 days worth of liquidated damages, and so there went all the profit on the job. But if you’re doing everything you can and there’s some delays that the owner and the design professional understand, you’re doing everything you can to get it done, you’re communicating with them, then a lot of times they can negotiate off those liquidated damage provisions.

Rob Williams: [00:11:25] Yeah. Yeah, that’s a really great point Stephen, because when we were newer commercial contractors, we would see these penalties, and we didn’t realize there was any kind of negotiation and things that go on. And my friends that had been doing this for decades, they had a totally different perspective on all that. And sometimes they made money on it. They knew how to work those systems because that was the main part of their job. And I guess we rookies going in to that, we didn’t know how to deal with that. And we didn’t realize that’s sometimes where the profits were made and some of these university jobs I know these guys had told me, gosh, we go in there with a very slight margin, but we come out a whole lot higher because all these delays that they charged for, and we didn’t know how to play that game. So our pocketbooks went down when theirs were going up because they could turn in all these extras and the delays and all the change orders and they made money on that. And we didn’t.

Stephen Brown: [00:12:30] Yeah, that’s an art form.

Rob Williams: [00:12:34] Yeah.

Do any of your guys get into that, Wade? Or…

Wade Carpenter: [00:12:38] We definitely see that when you have, you can have contract delays because of things like weather, and I know Rob, you used to do some stuff down in New Orleans or something like Hurricane Katrina comes through and that can put a contract way behind. One of the things I tell a lot of people, a lot of contractors know this, but you know, documenting if  you can’t work because of weather or something that is beyond your control, I think can help you avoid some of those damages. And, I think it’s important maybe to think about that when you sign that contract that, maybe you should put something in that contract to address that. And a lot of contractors or subcontractors assume they have to take their owner, whoever’s the owner of the GC, their standard contract. And sometimes they are pretty adamant about taking their contract, but you know, if they want the best price, sometimes you can negotiate some of those provisions.

Rob Williams: [00:13:40] Yeah, back in the Hurricane Katrina days, I do remember there were so many different delays from either materials or- down there, the delays a lot of times where code enforcement delays, because when this project was designed, you didn’t know how you were going to build them because they came up with all these new hurricane laws and different products were coming out.

And then the approval processes of putting the infrastructure in, but there were just delays on delays that were unexpected, and then it was, hurry up, hurry up, hurry up. So, those contract provisions- luckily we didn’t have a lot of those in there, but they would be almost impossible to predict.

And now I think what we’re into is material supply. I really get worried about some of these jobs. Earlier this morning I was just talking to an owner about a project and we’re talking about whether he can get materials or not for the project. And that’s a really big concern right now with COVID and who’s going to get the wood when it comes out of the mill and who’s not going to get it. And this was a small guy and I was concerned for him.

Stephen Brown: [00:14:51] Right. And then you can get your hands on the materials and your storing that materials. And how did, how do you get, how did you get paid for that when they haven’t been installed yet? You can negotiate in that contract. Usually they’ll want the materials stored at a certain place, certain secure place. They wanna, they want to knows that those materials are under some kind of joint control for the project so they’re not used for another project.

Rob Williams: [00:15:16] Yeah, I saw Chick-fil-A being built. It’s right around, right behind my house. Just about a mile from me. And it just sat there. All this material went out there and it sat there and it sat there. As fast as they serve their food, I kept wondering every time I would go by there, what material are they waiting for? There must be some kind of, something that won’t show up to the job to have all this material sitting there. And I thought about, I wonder what provisions these guys have. Because Chick-fil-A I know wants that building built! But now that brings up mobilization payments and the storage.

Wade Carpenter: [00:15:52] I have a lot of utility contractors. The guys that are digging the dirt. And they’re putting in pipe. But as far as like the stored material and things like pipe can be incredibly expensive, and a lot of those guys like to get that up front. A lot of times you can go ahead and order that hot pipe in one order you can get a better price at it, not to mention you, get it done and in place so that you can use it whenever you need it. So those can be some other things you can negotiate in there, especially if it’s critical on supplies.

Rob Williams: [00:16:23] Yeah. Stephen, I’m real curious to see you on the bonding and getting into that because I did a lot of storage and stuff, but I don’t think I turned anything in for payments for that. I wish I had realized that was a part of it. But I also owned the lumberyard and I had, I had about 10 acres to store things. I even had contractors, Wade, some highway contractors when things got slow and my yard was kinda empty, those highway contractors were storing all those cables and wires and stuff. They were renting space from me on my yard to store things for the highway construction. But I never even considered charging for that, Stephen!

 Stephen Brown: [00:17:01] Well again, you know, I go back to, what does the contract say? And I think maybe in the future, we ought to have a short talk about the different contracts that are out there. Standard AA contract, the engineers contract, the DocAssist contracts that are out there right now.

Rob Williams: [00:17:18] Yeah.

Stephen Brown: [00:17:19] Generally the contracts that are out there and standard, and the federal contracts are standard. They change, but they spell out exactly what you can or can’t do. And And so when we were talking about, that next topic of mobilization and utilization, the very first thing that you’re able to send a bill for for sure needs to include the bond premium. But also, how much can you front load the project with some mobilization utilization charges? Some contracts will allow you to do that, but you’ve put it as a line item in your contract. So why can’t you bill for it? As long as you’re low bidder on the job, it’s something they pretty much have to agree with. And then again, you’re handing them the bonds, you’re guaranteeing them performance and payment. So, why aren’t you paying me?

So I had a project guys where the financing from a private owner had not been secured and they were push, push, pushing to get this contract signed with my general contractor. And he was push push, pushing, they need a bond. They need a bond. And the bonding company wanted a letter. Is the financing secured? And the uh, the bank had a fit. You know: “What, of course it’s secured.” Well, we want a letter that the financing’s secured. And it was great because after the second paid request when nothing was getting paid, that letter allowed the attorneys for the bonding company to come and help our contractor put the squeeze on them.

Rob Williams: [00:18:52] Yeah, well, that’s great. Man this time has flown by. We’re already over our, allotted time. I appreciate you guys getting up early this morning and coming out and talking to us. So, this is great. Our exciting, enthralling conversations, just let time fly by. So we have a lot more topics to discuss.

Our Contractor Success Forum sounded really exciting today. So I am Rob Williams with IronGate Entrepreneurial Support Systems, driving profits in your business.

Stephen Brown: [00:19:23] I’m Stephen Brown with McDaniel-Whitley agency in Memphis, Tennessee. We figure out innovative solutions to your bonding problems.

Wade Carpenter: [00:19:30] And I’m Wade Carpenter with Carpenter and Company, CPAs outside of Atlanta, and we help contractors nationwide to build more profitable businesses.

Rob Williams: [00:19:38] Look in our show notes. We’ve been working on those. That’s how you can get in touch with us. Give us a call. If you have any questions, all of us are willing to talk to you. Contact us make comments, like us. And enjoy the show and come back and listen to the next one. So thanks a lot for attending the Contractor Success Forum today, and we’ll see you on the next episode.

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