This week, Alex Barthet returns to the podcast with some actionable tips to set yourself up to get paid on time, every time.
Topics we cover in this episode include:
- It starts with managing expectations in your written contract
- The top things to look out for in a contract that you might want to change
- Increase the notice and opportunity to cure on a default or a claim
- How to hold someone accountable to the terms of the contract
- Billing on time
- How to get into a new area of work the right way
- Make sure the owner has funds set aside to pay you
- Subcontractors and the pay when paid provision
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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com
[00:00:00] Wade Carpenter: Welcome to the Contractor Success Forum. Today we are talking about cashflow and discussing getting paid the easy way.
Here on the Contractor Success Forum, our mission is to provide game-changing financial education for contractors, to help you be more profitable, grow and succeed in your business.
And who’s here to help us do that? As usual, Stephen Brown with McDaniel Whitley Bonding and Insurance Agency. I’m Wade Carpenter with Carpenter and Company CPAs, and we are privileged to have back with us our special guest, Alex Barthet of the Barthet Law Firm. He was a guest over 40 episodes ago now, it’s hard to believe.
But Alex, can you tell us a little bit about who you are and what you do?
[00:00:48] Alex Barthet: Sure. Thanks Wade and Stephen. My name’s Alex Barthet. I am a board certified construction lawyer here in the state of Florida. I manage a team of about 20 people and all we do is help contractors, subcontractors, and suppliers with their contracts and getting paid. That’s what we do every day.
[00:01:07] Stephen Brown: Getting paid. That’s the title of this thing. Getting paid. What a nightmare.
[00:01:13] Alex Barthet: Oh my goodness. I, I could tell you some stories. I guess I will be telling you some stories about the problems that we see our clients get into. And one of the things I’m sure we’re gonna get into is a fair amount of them are problems that could have been avoided. Some of them are unavoidable, but, but a fair number of them, if you look back at them, you could realize, wow, had they only done this a little differently, we probably wouldn’t be in this situation.
[00:01:40] Stephen Brown: That’s right. And listeners, we were talking about this before the show started, and that is exactly right. Clear communication from the get-go. That’s a phrase that we use in my family around here. But getting started on the right foot is another way of phrasing that. Right?
It starts with managing expectations in your written contract
[00:01:59] Alex Barthet: Yeah, and it all starts with managing expectations in your written contract. It’s gotta be step number one. Easiest way to get paid is to have a good contract.
[00:02:11] Stephen Brown: Okay. It starts with the contract, but the owner gives you the contract and you’re just expected to sign it. And If you sign it without any changes or having your attorney look it over, then you agree to those terms and conditions. So if you’ve already signed it and you’ve agreed to it, then you gotta understand what the rules are and the rules are spelled out in the contract, right Alex?
[00:02:33] Alex Barthet: It’s funny clients call me and they say, this happened and that happened, and this other thing happened. What should I do, Alex? And I say, well, I need you to send me the contract. No, no, no. But, but this happened, and that happened. And so what should I do? I said, I, I need to look at the contract because until I look at the contract, I don’t know how to answer the question. Because that’s the rule book.
So what did you agree to before you started this job? That’s what we’re gonna have to look at and see what it says. And if someone’s handing you a contract, you can almost guarantee that it’s good for them and not good for you. So you need to read it and understand it and have an expert with expertise in construction contracts give you some advice.
[00:03:14] Stephen Brown: Okay, so not only just having the contract that sets all the terms and conditions. Because we also have the element of billing according to the contract. What other elements do we have, Wade, from your standpoint?
[00:03:27] Wade Carpenter: I know you, you said something about making people abide by the terms of the contract, but Alex, can you just kinda kick around a couple of things on the contract terms that I think you might be able to give us some unique insights on and–
[00:03:41] Alex Barthet: Sure. You know.
[00:03:42] Wade Carpenter: We’ll just start with.
The top things to look out for in a contract that you might want to change
[00:03:43] Alex Barthet: So a common refrain I hear from clients is, all right, Alex, I got this contract. I’ve been told that I’m gonna be the one that’s gonna get it. They’ve handed me this 60 page document. I don’t really wanna make a lot of changes. I really want this job. So what are the, the top one, two, or three changes you would make to this agreement?
Now, in reality, I’d like to make about 50 changes, some big, some small. But if pigeonholed, I usually tell clients, okay, number one is the right to stop work. If you are not getting paid, you need to have the unequivocal right to stop work.
Because if not, you’re gonna have to keep paying your payroll. Keep incurring costs with material vendor material suppliers, and you may not be getting paid.
And people think, well, wait a second, Alex. That doesn’t make any sense. Of course if I’m not getting paid, I have the right to stop work and then I open up the contract to page 37, paragraph 9.6, and it says, even if we’re in a dispute, even if I’m not paying you, you have to keep working. It says it right there.
So number one, change that provision. Put in a specific provision that says if I’m not getting paid within 30 days, 45 days, 60 days, some number of days that you have the right to stop working. That’s definitely number one. I’m guessing you guys see that affecting cash flow for a lot of businesses.
[00:05:08] Wade Carpenter: Yeah.
[00:05:09] Stephen Brown: Sure, and on public jobs and federal jobs, guys, you’ve got to understand every detail of that contract before you bid on it. Because if you bid on it, and there are other bidders, then you’re saying. I agree to all of the terms and provisions of this contract.
[00:05:25] Wade Carpenter: I know there’s several, several other things we wanted to hit on this episode, but can you throw out another couple of quick ones on the contract? You–
[00:05:34] Alex Barthet: Sure. So yeah, so having the right to stop work is definitely number one.
Increase the notice and opportunity to cure on a default or a claim
[00:05:39] Alex Barthet: Number two would be increasing the notice and opportunity to cure on a default or a claim.
So typically we see these contracts that say I can put you on notice of default and or terminate you in 24 hours, 48 hours, 72 hours.
And invariably when are you getting that notice? You’re getting it at five o’clock on Friday, on a long weekend, right? And you’re like, well, geez, what am I gonna do with that?
So typically we recommend that you change it to seven days. That it’s not just the right for them to default you, but they have to give you written notice and opportunity to cure.
And then this is the secret provision you can add. And it’s not just the the right to cure, it’s the right to commence the cure. And the important distinction there is that you’re not likely gonna fix whatever problem they give you in whatever notice per period you have.
So if you have a problem and they tell you, okay, you’ve got seven days to fix it, well, it may take you two weeks to get the part. So you’re never gonna be able to do it.
So what you want to do is you want to say that in that notice period, you’re gonna show them that you’ve commenced the cure and that you’re diligently proceeding with the cure, and then that should prevent the default. So if it takes two weeks to get a part, but you can show them that you ordered it on day two and that you’ve got your men out there and nothing has stopped, that’ll prevent you from being defaulted and, and terminated.
So in my opinion, that’s number two. Slow down the ability for the contractor or owner to default and terminate you.
[00:07:18] Wade Carpenter: Okay.
[00:07:19] Stephen Brown: Amen to that. Default triggers all the language of your general indemnity agreement that you sign with the bonding company. So if you’re gonna stop work on a bonded project, please let your bond agent know.
[00:07:32] Alex Barthet: Oh, for sure. Bonding companies hate surprises.
[00:07:35] Stephen Brown: Mm-hmm.
But if you know ahead of time and we communicate it then, then you’d be surprised at the help that you can get.
[00:07:42] Alex Barthet: Yeah. And maybe even avoid a default determination.
[00:07:45] Stephen Brown: That’s right. Which is everything guys. You default on a bonded contract, you can’t get bonds.
[00:07:53] Alex Barthet: Yeah, usually your surety will put you on, unless you’re got incredible, an incredible cash position, if you default on a bonded contract, your surety’s probably not gonna give you that next bid bond that you want when you have to bid that next job. Until this default is resolved.
How to hold someone accountable to the terms of the contract
[00:08:11] Wade Carpenter: Right. Well, Alex I know Stephen gave us notes beforehand, but he was talking about like the ability to hold somebody accountable for the terms of the contract. You’re in the middle of the contract without suing or whatever. Can you talk about some of those things a contractor might be able to do?
[00:08:29] Alex Barthet: Yeah. So part of the problem is dealing with people that may be unreasonable. And you sometimes don’t find that out until you’re one third into this project. So the contract is great. So having a good contract is, is critical. Documentation is absolutely important. Usually the person that has the better documentation is gonna prevail on a claim or at closeout or in a lawsuit.
But forcing people to abide by the contract is, is hard because anyone can just do anything. And what we see many times is that the person that has the money will sometimes use that money as leverage to do what they want, even if it is not in compliance with the law or in compliance with the contract.
So sometimes if you’re a sub on a job and they say, hey, we need you to sign this release, and you say, well, that’s not required by the statute, that’s not required by my contract, they say, well, then I guess you don’t wanna get your check. And how do you force them to do the right thing is is challenging because you need that check.
So one of the best ways that we have found is to properly vet the counterparty in your contract. I have clients call me on a pretty regular basis and they say, hey Alex, tell me about so-and-so contractor. Tell me about so-and-so owner. And then they hang up with me after they hear it from me, and then they call their bonding agent. Then they call their CPA. They call their insurance agent and they try to make informed decisions to only do business with people that have a a good reputation. So the most successful clients that we have use folks like us as a resource beyond just the actual service we provide.
[00:10:22] Wade Carpenter: All right.
[00:10:22] Stephen Brown: Amen to that. That’s a great point. And also when you have a situation where the owner is just being unscrupulous. And you, you’ve got the law on your side, you’ve got the contract, but you also have timing situations. You’ve got to stop work on a project and then start it back up. There’s a huge amount of cost involved there.
Then you’ve got all these people on payroll and you’ve got everything going the, the– it’s the last thing you wanna do is stop work on the project. But in certain situations you have to because you’re incurring costs that you just are really not gonna get paid for. And you’ll get paid eventually through the legal system. But at the same time, if you’re gonna go into that situation, by all means talk to us. Because all three of us have been through that so many times.
[00:11:13] Wade Carpenter: Yeah, let’s change direction a little bit. Cause I know we were talking about a couple other situations where, I know I see this all the time.
Billing on time
[00:11:21] Wade Carpenter: A contractor doesn’t bill on time or they’re not accurate or whatever. And so that can really affect cash flow and getting paid on time. So can, can either of you speak to that for a little bit?
[00:11:32] Stephen Brown: Billing on time, understanding what that contract says about your ability to bill and what’s needed, what forms, what paperwork what documentation you need to bill. And then our last podcast, Alex, we were talking about just simple things that a contractor didn’t know that they could and should bill for. Oh, we’ve never done it that way. So, that’s not how we bill.
[00:11:57] Alex Barthet: Yeah, again, it goes, it really goes back to the contract. Most contracts that we see say these are the list of things you need to give us in order for your bill to be considered complete. It’s usually a detailed list. It also says the date On which you need to submit the bill, which is really important.
And then number three, it usually says, and this is the kicker that you mentioned, Wade, if it’s incomplete or you miss the date, then you’re not billing till the next billing period,
[00:12:29] Stephen Brown: Right, so, so if the billing period’s the 25th, bill it on the 20th and then communicate that they’ve agreed to your bill before the 25th. That way you don’t have to wait 60 days to get paid.
[00:12:42] Alex Barthet: Right.
Get your bills into accounting
[00:12:43] Wade Carpenter: Well, I guess the next one on the list too, which I think Stephen brought up, but I see this all the time, is project managers don’t get, I know this is an accountant thing, but project managers don’t get their bills into the accounting, so they don’t get into that month’s pay apps. So, anything, any thoughts on that?
[00:13:03] Stephen Brown: Yeah. Pay your project manager like a sub paid as paid provision. That would do it.
[00:13:09] Alex Barthet: He can only come pick up his paycheck when he’s done all his work by the 25th of the month.
[00:13:13] Stephen Brown: I don’t think that’s practical, but you know, you’ve got to ride herd on making sure that’s done. I have a number of clients that have basically, their title is project manager executive. And basically their job is riding herd over that paperwork being there on time.
They’re gonna make your life miserable if you don’t do it, it’s gonna come to the owner’s attention that you’re not doing it, and that’s grounds for termination.
[00:13:45] Alex Barthet: It’s a lot of work to get all of this paperwork together, because a lot of it, even if you do all of your work on time, you’ve got subs and suppliers and you need their paperwork and the controller at the supplier’s office is on a 10 day vacation in Italy. And they left on the, on the 20th and they’re coming back 10 days later and they’re gonna miss the billing period. Right. What do you do? So, yes, part of it is just being on it and being aware and having someone take control of that process.
[00:14:12] Stephen Brown: Right. And if you’re doing federal contracting work you have to understand the rules are absolutely inflexible. Just know that going into it. Be an expert, ask tons of questions before the project starts. That’s the way contracting specialists for the government want you to behave with them, is they wanna make sure you know the rules.
How to get into a new area of work the right way
[00:14:37] Alex Barthet: Yeah. And, and there’s two pieces of advice that I could give in that regard. Number one if you’re going to get into a new area, a new geographic area, a new line of business, a new type of construction, start small. Don’t start with a really big contract in that area, number one.
And number two, if you are gonna do something larger, consider teaming up with somebody that has a great deal of experience in that area. Create a joint venture, enter into a teaming agreement. Do something along the lines to bring someone with a level of expertise.
We have a client now who is a large shell contractor. They’ll do 30 to $50 million every year, and you think, wow. They must know what they’re doing. And they entered into this one agreement for a 20 million shell package. That instead of is generally lower in elevation and bigger, which is what they understand and know, that’s what they’ve been doing for a long time. They went into the a job and and this is a high-rise. So contract size, about the same, totally different experience.
And they are, they are suffering. They’re gonna lose a couple million dollars on this job because it was a totally new endeavor for them. New equipment. The people they had, you would think could do the same work, not quite as efficient, doing a high rise versus other types of work. So they learned their lesson. It’s a very expensive lesson.
[00:16:16] Stephen Brown: Was that a bonded project, Alex?
[00:16:18] Alex Barthet: It is. So I’ve had many conversations with my client’s bonding company to keep them at ease because we’ve got liquidated damages. We had to deal with material price escalation. A lot of issues on this project. There was a prevailing wage component, a local workforce requirement, none of which the client was aware of.
On top of all of that, you have again, this new type of construction that he wasn’t used to. So it was like a perfect storm for him.
[00:16:48] Stephen Brown: Right. I mean, plugging myself, a good bond agent and a good company relationship wouldn’t have just looked at that contractor’s current numbers. They would’ve looked at the project itself and said, guys, we wanna support you on this, but we gotta understand this is high rise versus what you regularly do.
These are the elements in the contract that we see. Is this a concern to you and why? We, a lot of times we talk contractors into not doing a job. We never say no, but just use logic in talking talking them out of, of doing a job. That’s, that’s what we do, Alex.
[00:17:26] Alex Barthet: Correct. Yeah. Had I been approached before the contract was signed, I probably would’ve raised some of those concerns, but unfortunately in my business, most of the time I get the call when the, the building’s on fire. Not, not before.
[00:17:43] Stephen Brown: All right. That’s a, that’s a key point to today’s podcast. Use us, folks. Use us before you signed the contract.
Make sure the owner has funds set aside to pay you
[00:17:50] Stephen Brown: Next thing we, we had on the list was making sure the owner has the funds set aside to pay you.
[00:17:57] Wade Carpenter: Yeah, I thought that led right into Alex talking about, before you sign a contract. Stephen and I were talking about this before the show about making sure that they can pay you. So can we talk about that for a little bit?
[00:18:13] Alex Barthet: On public jobs, it’s not much of a concern, right? Unless the city that you’re working for goes bankrupt, or–
[00:18:20] Stephen Brown: Or they’re depending on a grant.
[00:18:23] Alex Barthet: That’s true too.
[00:18:24] Stephen Brown: They may not even applied for that grant yet. So a simple question in the pre-bid, oh, okay. Is this funded by a grant? Have you received the money from that grant yet? Oh, no, no. We need to get your bid and then we’ll fill out the grant. Uh um, gosh, I’m sorry.
[00:18:40] Alex Barthet: Those are good things to know.
[00:18:41] Stephen Brown: Set me off.
[00:18:42] Alex Barthet: On, on a private project though as the general contractor, one of the things, again, it’s a pretty standard request. It’s in the AIA contract is as an example, verify funding. One of the changes that we make when when we look at those contracts for the contractor. So the standard provision in an AIA is that you can verify funding prior to commencement of the project, we like to change it, that we can verify funding at reasonable points in time during the course of the project.
So we don’t just limit it to, well, it looks like you’ve got this a hundred million dollar loan, everything must be fine. We wanna be able to spot check during the course of the project if there are any concerns and say, okay, well there’s 70 million left of the construction work. How much is left in the construction loan? Let’s check on that.
Because for all the developer is using the money legitimately under the terms of the loan for things other than construction, only to find out that when you get to the end of the job, there may not be enough to finish it.
So, having that right to occasionally check on the status of funding is important.
On smaller construction, though, to some degree, we find that you have to rely on your lien rights or as a sub, rights against a payment bond, because there’s just not that much information that’s available to you. And if you sign a contract that says pay when paid, so if I’m a sub and I sign a pay when paid contract, well then, who do I check the credit of? It’s not the contractor. It’s gotta be back at the owner, but I don’t have that right that the contractor does to check to see if the owner has funding.
[00:20:25] Stephen Brown: If it’s a bonded project, as a sub, you should get a copy of the general contractor’s bond before you sign your contract. That’s one recourse. And also, like you were mentioned, checking along the way, you’ve got change orders, do you have the money set aside for that? And if it’s a private job too, at least in the beginning, if, if you’re shy about verifying funding, you can always have your bond agent. Because before I do a job on a private project, I’m gonna get a letter from the financing institution that the money’s been set aside for the project.
But that was such a great point, Alex, because things change during the course of the project. And the owner may or may not use that money to pay you.
[00:21:07] Alex Barthet: Yeah, going back to the idea of using folks like us, one of the things I tell clients is you pay me to be the bad guy. So if you ever need cover, just blame me. Just, it’s really easy. You don’t even have to ask my permission. I got this pain in the ass lawyer. He tells me I gotta do this. So you know, I’m really sorry, but I gotta do this.
So I’m guessing you guys do the same thing. You know you can, it’s easy to blame the surety. I had love to help you, but the surety needs x.
[00:21:33] Stephen Brown: Yeah.
[00:21:34] Wade Carpenter: Same thing. Yeah. Come, come in and the CPAs made me do this, so, so we are the bad guy a lot of times.
But yeah, I think you guys kinda also kinda went into the sub discussion. And we’ve been talking a lot about general contractors, but Alex, what, what are some of the rules you’ve already been throwing out there, but getting paid from sub standpoint versus a general contractor?
Subcontractors and the pay when paid provision
[00:21:57] Alex Barthet: So the number one issue that we see on the sub side is the pay when paid provision. So it’s pretty significant in Florida. In some states it’s illegal. In most states it is legal. In Florida, for example, it is legal, meaning most contracts we see have pay when paid provisions in them. And what does that mean?
That means that if the contractor isn’t paid by the owner, then they don’t have to pay you. Legitimately, legally, they don’t have to pay you. So that means you need to count on your payment from some other source, which is either a lien on the project, which almost always is gonna be after the construction loan. So you’re gonna be second to the construction lender, subject to any equity that may be on the property.
If the contractor has a bond, then that may be your recourse for payment is to make a claim on that payment bond. We also deal with sub subcontractors or suppliers to subcontractors, and one of the things we tell them to look for, another pro tip here is, is the subcontractor bonded?
On these big jobs, it’s not uncommon for, as an example, if I sell the rebar in the building, right? I’m a rebar supplier. And who am I selling to? I’m selling to the Shell contractor. Most contractors are gonna bond back their sub. So the shell contractor’s gonna have a bond.
Now, that payment of performance bond’s typically not in the public record, but the person that’s willing to give you a copy of that bond real quick is the contractor. So, we say to the rebar supplier, okay, call the contractor. Get a copy of the subs bond and make a claim against that sub bond.
So there’s ways to get paid, ways to secure your payment. Again, it’s just managing expectations. Are you aware of these things and this is how, what you’re gonna have to do to get paid.
[00:23:56] Stephen Brown: Mm. Recently the Surety and Fidelity Association of America put out a study saying that bonded projects were performed better. They were performed more efficiently. There were less headaches and situations from an owner that requires bonds. And that’s a great point.
As a general contractor, you bonding back your subs is a great way for you to assure that in a situation where someone is not getting paid as a subcontractor involved that both of you are on the same foot. Because remember, surety companies have huge legal departments. You don’t want to get them involved if you can help it.
But in a situation where you have to stop work on a job, and the owners threaten to put you in default and they’re not paying you, communication’s everything. Again, back to the same thing we started with at the beginning of the podcast, guys. Use your board of directors. That’s us.
[00:24:58] Alex Barthet: It makes a huge difference. And one of the things that I have seen as a trend over the last few years, I’m not sure if you all see the same thing. We see fewer contractors bonding projects as a whole. I’m talking private projects now.
[00:25:15] Stephen Brown: Mm-hmm.
[00:25:15] Alex Barthet: And requiring most of the subs and especially the key subs to, to bond back with dual obligee bond writers. Meaning the owner is looking to save some money rather than paying a point, and then another point to the subs. Get a solid contractor and then get the subs to bond. Are you seeing the same thing?
[00:25:39] Wade Carpenter: Yep.
[00:25:40] Stephen Brown: All the time.
[00:25:41] Alex Barthet: So as a sub, what I tell my sub clients, they say, well, of course the job’s bonded because I gave a bond. I said, well, that does, just because you gave a bond doesn’t mean that the GC’s bonded. You need to verify that the GC’s bonded.
[00:25:55] Wade Carpenter: Good point. Okay. Well, I know we’re running a little long. So any last thoughts? This has been great information. This is a topic that we could talk for hours probably on, but Alex, any, any last thoughts before we wrap up?
[00:26:10] Alex Barthet: Yeah. What I would end with is don’t be, I get clients that say, well, look, I, I don’t really wanna send a notice to owner or a preliminary notice or a lien. I don’t wanna ruffle any feathers.
And my answer to them is, well, what, which would you prefer? To be that person that no one is worried about? Or do you wanna get paid because you gotta do those things that protect your company and help you get paid. And doing a notice to owner, sending a notice to owner, a claim of lien, a notice of nonpayment, whatever it is that you need to do to get paid is something that is, should really be no question.
We have a lot of clients that send notices, have liens on properties, have made bond claims, are in litigation with owners and contractors, and they are being asked to bid other projects by the same people. So it’s not that just because you record a lien, you’ll never get another piece of work.
At least in the Florida market, and I think it’s fair to say in many other markets, it’s the, it’s not automatically a black mark. People take you more seriously because they know that you’re out there to protect your own interests. So I would encourage you to do that. Don’t be a ashamed to enforce your rights.
[00:27:34] Wade Carpenter: Great.
[00:27:35] Stephen Brown: I love it. Don’t be ashamed to enforce your rights. Yeah.
[00:27:39] Wade Carpenter: All right. Well, great advice, Alex. We really appreciate you coming and wanted to thank you all for listening to the Contractor Success Forum, wherever you might be tuning in. Find us on all major podcast platforms, on the ContractorSuccessForum.com or Carpenter CPA’s YouTube channel for more information.
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