It’s no secret that great subcontractors are getting harder to come by. They’re in short supply and smart contractors hold onto them as long as possible. After all, good subs help deliver projects on time, on budget, and to spec. They can make or break the profit margin. But for some reason, general contractors make keeping them harder than it has to be.
It really comes down to prioritizing communication and subcontractor payments.
When a good subcontractor doesn’t worry about getting paid, they’re likely to form strong, long-term relationships. We’ll take a deep dive into sub payments to simplify the process of keeping these pros happy and keeping your projects on track.
What Are Subcontractor Payments?
The concept of subcontractor payments is simple. When a contractor hires a subcontractor, the subcontractor submits invoices for materials and work performed. The contractor reviews the invoice and pays the subcontractor. That’s a subcontractor payment.
But, we know that paying subs isn’t always so cut and dry. Before a contractor can pay a sub, they need money. Here’s the real process:
- Subcontractors perform work and submit their invoices.
- The general contractor collects and reviews the invoices.
- The owner pays the GC a progress payment (unless otherwise stated in the contract).
- The GC pays the subcontractors.
The construction industry accepts this payment chain as the status quo. Everyone uses it. Everyone understands it. But few like it and many suffer from its inefficiencies.
The Payment Chain Has Its Issues
While this traditional payment chain is widely accepted, it can cause issues. For example, there is a lack of transparency throughout the chain. Even in residential, where fewer people stand between subcontractors and their checks, several people handling your dollars and cents can cause distrust.
Unfortunately, payment disputes plague the industry, and their causes vary. Homeowners can be slow to pay their GCs due to lending concerns or general inexperience with construction. Subcontractors can submit faulty or inaccurate pay apps. General contractors often have to hold onto the money until they’ve been paid enough from the owner. Also, unclear payment terms can confuse, leaving subcontractors unsure of the invoice requirements.
In short, it’s best to avoid these problems at all, and it primarily comes down to efficient communication subcontractor payment.
Improving Subcontractor Payments is Simple
Complication often prevents progress, and we like to keep things as straightforward as possible. The following tips will help streamline subcontractors' payments and even avoid some of the most common disputes.
Establish Clear Payment Terms
Every contract and subcontract should contain clear payment terms. Whether the contract is time and materials, progress payment, or lump sum, the payment schedule should be clearly outlined. Dates for payment applications should also be clearly defined, allowing contractors to set the expectation for prompt submissions.
It’s also important for contractors to explain how subs will be paid. Electronic payments and direct deposits are simpler, faster, and easier despite paper checks being common in the industry. And, if any retainage will be held, it needs to be outlined in clear, plain language.
Pro Tip: GCs shouldn’t shy from “pay-when-paid” clauses. These clauses protect the general contractor from having to fork out cash before they’ve been paid by the project owner. Unlike “pay-if-paid” clauses, pay-when-paid is fair and favored by the industry.
Digitize the Payment Process
If you’re looking for the simplest answer to how to pay a subcontractor, move toward digital payments. Electronic payment platforms allow GCs to collect lien waivers, payment applications, and other important documents electronically, vastly reducing the amount of administrative time dedicated to payments.
Digital payment platforms also provide payment status updates, collect digital signatures, and ensure secure payment processing. They also improve transparency by holding all of the payment activity out in the open for owners, contractors, and subs to access.
Rely on Automation
Electronic payment platforms are wonderful from an organizational standpoint, but they’re not just one-trick ponies. Contractors can set their payments up to flow to the various parties automatically, ensuring no one is missed. When the contractor is paid, the approved pay apps from the subcontractors will automatically be filled.
Another Pro Tip: Learning how to pay subcontractors automatically does have a hitch, though. Payments can only be automated if the GC knows everyone on the project. If you are collecting lien waivers, make it clear to subcontractors that any of their subs or suppliers must send preliminary notices so their payments can be automated.
Track Payments and Deadlines
It’s also critical to keep track of subcontractors’ payments and deadlines. Tracking the status of current payments and when subcontractors need to be paid allows contractors to make better cash flow decisions without upsetting their subs.
This can be hard to do on paper, but there are software programs that make it easy. When a payment application is submitted, the due date is automatically entered into the system. Warnings can be set to ensure the contractor doesn’t miss a subcontractor’s payment.
Make Communication a Priority
Finally, make sure that communication is a priority. Open lines of communication throughout a construction team ensures that everyone has access to the same information and can bring up questions, issues, or otherwise leave comments for stakeholders and other parties on the project to see. When subcontractors feel like they’re connected to the project via lines of communication, they tend to trust the people running the project more.
Construction software platforms are the key. These platforms allow subcontractors to leave notes, update/sign documents in real time, and receive important feedback or answers from the right people. Rather than using email, which tends to silo messages between parties and requires attachments and other complications, construction software stores all of the invoices, data, and communication in one program.
Legal Aspects of Subcontractor Payments
There are some legal aspects of subcontractor payments that you need to understand. For one, you’ll need to collect a W9 form from any subcontractor that you pay more than $600 over a calendar year. Then, you’ll use the information from that W9 to produce a 1099 form at the end of the year.
Also, if you’re wondering how long a contractor has to pay a subcontractor—it varies. Some states have “prompt payment” laws that require payment within certain time frames of the owner’s receipt of an approved invoice. In NY, these laws only apply to some residential private projects, but in California, they apply to private and public projects. Texas, Florida, and other states have similar laws as well, and there are even interest charges allowed for late payments. We recommend looking up local laws for your State or County to ensure you're following legal guidelines.
That’s not all, either. Subcontractors can file a lien against the property if they’re not paid for their work. A lien can freeze financing and even force the sale of the property to ensure the subcontractor is paid for their work. This makes collecting lien waivers incredibly important for general contractors and project owners.
Leverage Beam’s Bill Payment
Beam’s bill payment platform takes all of the guesswork out of subcontractor management and payments. It can automate some of the most common processes, such as managing vendors, requesting lien waivers, and payment disbursement. It also makes it easier for contractors to track payments, receive digital invoices, manage vendor compliance docs, and watch their overall financial performance on all of their projects.
Beam doesn’t just manage subcontractors, though. It also has solutions for managing change orders, real-time job costing, submitting estimates, and even business checking accounts. It also integrates seamlessly with QuickBooks. Schedule your demo with Beam and experience all its capabilities today.