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Paying subcontractors

September 29, 2008

Question: I believe it is unreasonable and uncommon to only be paid at the end of extended projects, yet that’s what I’ve been asked to accept. I certainly cannot afford this kind of cash flow. If you (Z) subcontract through another company (X), do you get paid progressively during the project? How do they (X) bill the client (Y)?

My response: If the people subcontracting you can’t afford to pay you when you need to be paid, then they may have a cash flow problem of their own. And not just caused by the payment terms of company Y.

I’ve worked at both ends—as an employer (X) of a subcontractor (Z) to a company (Y), but I would never have done this had I not been able to pay my subcontractor. And I’ve worked as Z to X, who worked for Y—I expected, and received, prompt payment from X even though I knew that Y would take an age to pay them (Y was a government department).

In the case of being an employer to a subcontractor, I knew that the company (Y) paid 30 days in arrears, so I had to wait up to two months for money from them. However, I paid my subcontractor every two weeks, even though it was some time before I received that money from Y. Before I took the subcontractor on, I checked the bank balance, got out the calculator, and made sure that I could cover his payments for up to ten weeks without a problem (this was a six month subcontract). Had I not been able to, I would’ve bowed out of the contract or negotiated different payment terms with my subcontractor… but I still would’ve paid him each month. I’d had previous contracts with Y so I knew not only their payment terms, but also their reliability (it was good). Yes, this put a little bit of pressure on me and the bank balance went down more than it went up for a short period, but at the end of the subcontract I was still receiving money from Y even though I was no longer paying Z. So it all balanced out in the end.

I’d be looking at negotiating better terms for yourself. Remember, you are working for X, not for Y, even though the work is ultimately being delivered to Y. It is X’s responsibility to pay you promptly, and you need to negotiate with them. Dragging Y’s payment terms with X into the equation is a red herring and a ploy to make you sympathetic and accepting of an unacceptable situation. Look at what you can bear (say, 30 days), and negotiate for that.

Maybe X also needs some education on balloon payments at the end of a contract. For one of that length, they should be looking at either regular payments across the life of the project, or a 30% up front fee, then progress payments throughout. Y is getting out of this cheap—their money stays in the bank earning interest while the work is being done. And if Y goes belly-up after 3 months, where do you and X stand? My guess would be that you’d be way down the list of creditors to be paid.

Ultimately, though, it depends how much you want the job and to maintain the relationship between you a X. Can you deal directly with Y, or would this just make it worse?

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