When you’re working with subcontractors and suppliers, joint checks can help ensure everyone gets paid. Just make sure to be careful about the agreement and how you handle the checks on your books. We’re covering the basics on this week’s episode.
Topics we cover in this episode include:
- Joint checks: definition and most common examples
- Joint checks and fraud
- Joint Check Agreement
- The Joint Check rule
- Joint checks and accounting considerations
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[00:00:00] Rob Williams: Welcome to the Contractor Success Forum! Today, we’re discussing dealing with joint checks in construction and what that means to all of our contractors out there. Because we here at the Contractor Success Forum are here to discuss how to run a more profitable, successful construction business.
And who is here to help us figure that out? We have Wade Carpenter, Carpenter and Company CPAs. We have Stephen Brown with McDaniel Whitley bonding and insurance agency. And I am Rob Williams with IronGate Entrepreneurial Support Systems, but we don’t build iron gates. So don’t send us any RFQs for iron gates! We get plenty of those.
Alright. So today, what do we need to know about joint checks?
[00:00:54] Stephen Brown: This was Wade’s topic, Rob, and I did not know that you could write company checks for pot, uh, and write it off as a tax deduction.
[00:01:03] Wade Carpenter: All right now.
[00:01:06] Rob Williams: Yeah.
[00:01:06] Wade Carpenter: We’re going off on a tangent.
[00:01:08] Stephen Brown: Joint checks.
[00:01:08] Rob Williams: And I guess we should all order a stamp with our signatures of an owner so we can just stamp that. I do remember my accounting staff ordered one with my signature one time, like, what is that? They said, oh, that’s your signature, so you won’t have to sign them.
It’s amazing to me how quickly a joint check can be produced these days. And I don’t really understand it, Wade. The whole idea is to have some control over that check going out.
Joint checks: definition and most common examples
[00:01:32] Wade Carpenter: Well, if we can, let’s just start with a simple definition. Essentially all we’re talking about is a check with two or more names on it when payment is made jointly to ensure debts are satisfied. And they’re very common in construction. I mean, you know, the purpose is, at least one of the parties can get some kind of comfort level. Either that they’re gonna get paid, or the right person gets paid and they’re not gonna end up with liens and things like that.
[00:01:56] Stephen Brown: How do you decide who’s gonna be the co/joint check signer if you’re a sole owner?
[00:02:02] Rob Williams: Is this signer or casher? Which way are you talking about this going, Wade?
The two most common examples
[00:02:07] Wade Carpenter: Let me explain the two common examples. You know, you have a general contractor and then a sub with a material supplier. Where a general contractor wants to ensure that their project doesn’t get a lien filed because the supplier didn’t get paid. When they paid the sub, the sub had cash flow problems and they didn’t pay the supplier. So that’s example one.
Number two, and this is a little less common, but we have seen where a material supplier wants a joint check agreement because either the sub that’s gonna be purchasing the supplies doesn’t have the credit with them to purchase it, or they just wanna protect against nonpayment. And they don’t have to go down that road.
[00:02:47] Stephen Brown: So is it like combination joint checking lean waiver, or what is–
[00:02:51] Wade Carpenter: Well, the typical scenario, the general contractor writes a check and there’s two parties on the check. So both of them have to sign the check to–
[00:02:59] Rob Williams: I think the people might be thinking, this is like a joint checking account where there are two people that sign the check. But this one we’re saying there are two people paid to two different people as a joint check.
That’s what we’re talking about. Aren’t we, Wade?
[00:03:12] Wade Carpenter: Right. We were actually talking about a joint venture this week and we could have three or even four parties on a joint check so that somebody could be making this out to multiple people depending on who the subcontractors are and when a joint venture’s involved.
[00:03:28] Rob Williams: For me, there are two big questions. One, logistically, how do you do this? And then two, why do you do this? Maybe why is the first one. And then the second one is, if you do it, do you just put Billy and Bob, you know, or whatever?
[00:03:41] Wade Carpenter: Well, exactly. The general contractor would put the subcontractor name on there as well as the supplier name and the subcontractor has to sign it. And then the supplier also signs it and puts it in the bank.
Joint checks and fraud
[00:03:55] Rob Williams: Is this something common that the banks know not to cash or deposit that check unless the other signature is on there? Is this common enough that they would know?
[00:04:04] Wade Carpenter: They should. And, I guess kind of jumping forward with a little bit that, some of the fraud in this is, if say a a subcontractor had cash flow problems and well, they go and forge the supplier signature and thinking, hey, I’m gonna catch them up down the road. That’s fraud. That’s check fraud.
[00:04:21] Rob Williams: But now doesn’t “For deposit only” on the back of the check just cover everything, when you just deposit “for deposit only”?
[00:04:29] Wade Carpenter: Well, if there’s two names on it that does not cover it.
Joint Check Agreement
[00:04:31] Wade Carpenter: I mean, you gotta have both signatures on it. So, but there’s some things you’ve probably need to know and, typically there should be a joint check agreement. The joint check agreement is essentially a contract where, there’s an obligation where one party agrees to pay or to gives permission to make payments in the form of a joint check, where two parties are on the check, right?
But the one thing that a lot of people don’t know is number one, all the parties that are in that agreement, they need to sign that agreement. Otherwise it’s not binding. So, your supplier may need to get paid this way, or your general contractor wants to ensure that they get paid that way. So they end up, somebody forges the signature of the supplier. Well, that’s another common fraud issue. And I know that we’re not attorneys here, but this is one area where you should have a good construction attorney because there is actually no federal or state law that governs these things. And they’re subject to what’s written in the contract. Did you guys know that?
[00:05:32] Rob Williams: No. I actually I’ve really never used these before, these joint checks. We did on a project that had like multiple layers, I do remember that some of that stuff downtown Stephen, remember when I was framing those houses? And there were some joint checks involved in that because the contractor that– the general Contractor had hired a home builder contractor was always paying the bills and got behind. And I remember meeting with the bank saying, you’re paying these things and I hadn’t gotten any checks! So I think there ended up being some joint checking and then they had a partner that was backing him financially. So that’s really the only time I’ve run into this.
[00:06:09] Wade Carpenter: I’ve had some that have had to do that and like one particular concrete contractor we’re working on a joint venture, that’s got 18 million in concrete and about another 8 million in rebar. And this supplier is wanting to make sure that they get paid. And quite frankly the subcontractor that’s doing it, they don’t have the credit to do that. They don’t have the bonding capacity to do that. So, maybe at some point we could, you know, I think Stephen and I need kicked around things like funds control, but you know, that’s a topic for another day.
But the thing to realize on this is there is no such thing as a federal or state law that governs these things. There is no such thing as a standard joint check agreement. And we could probably go around the industry or Google and probably find 50 or more “standard joint check agreements”. There is no such thing. So.
[00:06:57] Rob Williams: So if I’m paying a subcontractor, let’s say I’m a contractor and I hire a guy to turnkey frame my house. That’s probably not a really good example, because most people don’t do it that way. But say I did. So I just write on there, So-and-So Lumber Yard and this guy. But you can’t really do that if you don’t or can you, if you don’t have an agreement already set out before you write the check?
[00:07:23] Wade Carpenter: Well, you certainly could, but you know, you stand the chance that number one, one party or the other could say you didn’t pay me or whatever. And there was no agreement to do that. So–
[00:07:36] Rob Williams: But I put both names on there, right? So, but is that not enough?
Joint check rule
[00:07:40] Wade Carpenter: Well, that’s not really enough. And leading into the next topic I wanted to hit, was basically, there’s such thing as what they refer to as a joint check rule. And why as a sub or a sub, you know, material supplier, you should really understand that. Let’s say we got a joint check between a sub and a supplier, and basically that supplier endorses that check and cashes that check.
What they’re doing is certifying that general contractor has paid all the amounts up to the date of that check. So just an example, suppose a supplier was owed a hundred thousand dollars on it. And, they give them a partial check in the amount of say $65,000. And maybe they’re getting towards the end of the contract. If they accept that $65,000 and they had some other, like $35,000 more bills in there, they could be forfeiting the right to make a bond claim or put liens on the job.
[00:08:35] Rob Williams: But without an agreement, they’re signing that check, but they’re not necessarily saying all the materials are paid. I guess that’s still not a lien waiver or anything. I don’t know exactly how this coincides with a lien waiver.
[00:08:50] Wade Carpenter: Well, if you don’t have an agreement signed
[00:08:53] Rob Williams: Doesn’t really mean anything, does it?
[00:08:54] Wade Carpenter: It’s not binding on anybody.
[00:08:56] Rob Williams: Yeah. It just means the supplier is aware of what this other person’s doing, whoever the other– so he just knows, well, before I sign this check, I’m at least I’m gonna make a decision whether I need to make him catch up paying his bills or let him ride further.
[00:09:11] Wade Carpenter: I’m mainly talking about commercial construction here, but you also see it, say like, restoration businesses where insurance companies will pay a restoration company and the homeowner. But–
[00:09:22] Rob Williams: You know, I have seen that. I’ve seen that before.
Joint checks and accounting difficulties
[00:09:25] Wade Carpenter: Well, it happens a lot more than you think. But the reason I wanted to bring it up is, if I can just talk about some of the accounting difficulties it. Rob, I think you already kind mentioned it can be a nightmare if you’re not treating these things properly.
[00:09:38] Rob Williams: What kind of accounting problems would there be?
[00:09:41] Wade Carpenter: There are two scenarios that I wanna kind of talk about. The first of all, is if a contractor is doing their books properly and keeping them up properly, you’ve got, say the example I gave, you’ve got a subcontractor turns in a pay app or an invoice to the general contractor. And that also includes the supplier materials that’s on that pay app. Right? And then that subcontractor also should have an accounts payable invoice from the supplier.
So on their books, they should be recording a receivable for the invoice and a payable for the bill. Now what ends up happening when you have somebody that gets a joint check? Well, the subcontractor may endorse it, but then it goes over to the supplier. It never hits the subcontractor’s books. So a lot of times we’ll see where, you know, the receivable sits on there for six months, and then you’ve got this payable that’s also sitting on there for six months. And then we say, hey, what’s going on with this? Oh, well, that’s done. Well, what have you done in the meantime? Well, it skewed your working capital ratio. If we’re doing job schedules for Stephen, your revenue could be understated. Your costs could be understated. And when you go looking, hey, the contract was supposed to be this, well, what’s going on?
[00:10:59] Stephen Brown: So what do they need to do in-house to fix that, Wade? To make sure that doesn’t happen?
[00:11:04] Wade Carpenter: Well, it depends on the accounting system, but quite frankly, that’s one of the things that, number one, if the accounting people don’t know about it, it doesn’t get fixed. But what should be happening is the accounting is told, and that’s where it gets a little squirrely because you got a receivable, and a customer, and a vendor, the payable. And you’ve got these things out there that need go away. And most of the accounting systems, people that don’t know how to treat these things, they’ll do it with a journal entry and they end up messing up their cash flow and all that stuff in the cash books. What we end up having to do a lot of times is just create like a dummy check and a dummy deposit so that they wipe against each other. And that’s the way we get them off the books. That way we’re recording the revenue and the cost side as well.
[00:11:53] Stephen Brown: Okay.
[00:11:53] Rob Williams: You may have already just said it in there as I was trying to think of the logistics of this. Who usually actually puts the check in the bank? The supplier or the sub that got paid? Or whatever the scenario is.
[00:12:07] Wade Carpenter: I guess I’ve been confusing everybody on this episode. I don’t know, you know, Basically–
[00:12:11] Stephen Brown: No. I was just making a note to myself about when I write a check to my chiropractor, that would be a joint. No. Wade, we’ve rattled you enough here with ridiculousness.
[00:12:22] Rob Williams: So it could go either way though, is that question. The supplier could keep the check and put it in his bank or the subcontractor could get the supplier to sign. I’m assuming it’s a supplier and a sub. I guess it could be a homeowner and a, like you said, an insurance company or.
[00:12:36] Wade Carpenter: Well, typically it’s from the general contractor who writes the check to two parties and the check goes to the subcontractor first, and they’ve gotta sign it and then they give it to the supplier. That’s typically the way it goes.
[00:12:48] Rob Williams: Then the supplier puts it in his bank.
[00:12:51] Wade Carpenter: Yeah. So it never actually hits the bank of the subcontractor.
[00:12:55] Rob Williams: Got it. So, yeah. So it just–
[00:12:58] Stephen Brown: So it never–
[00:12:58] Rob Williams: –to that, that accounts receivable of the subcontractor. See, I would think it would be journal entries, too, if I’m the subcontractor. So yeah, there are a lot of problems there that I would not have thought about on making these accounts balance between the–
Joint checks and cash basis bookkeeping
[00:13:12] Wade Carpenter: Well, and again, you know, that’s the same kind of thing. I said there’s two scenarios. The first one is they’re doing proper accrual basis books. The second, and contractors do this all the time, they strictly run their books to turn in a tax return. So essentially it’s cash basis. Well, again, the same issue, they had no idea that they should be booking more revenue and they had no idea they should be also booking more costs on these things. So–
[00:13:42] Stephen Brown: Runs deep, Wade.
[00:13:44] Wade Carpenter: Well, that’s why I thought you would appreciate this, because it could mess up your bonding and things like that. So I hope you guys at least have gotten a little bit out of this, but we really kinda only scratched the surface of this topic.
[00:13:57] Rob Williams: But I think you did a good job. I think this is good for me. I got, I just didn’t even think about this being an issue. And when it has come up in the past, it’s just okay, whatever they tell me to do about it. It comes up so rarely that I’m just not gonna understand it. At least for me, it didn’t come up very much.
So, yeah. Being able to just have the general idea of what’s going on with this and even think about it as being a possibility. Because we could spend three more hours going into exactly how to do it, but I think this is a good length of getting the idea.
Laws that could affect joint checks
[00:14:28] Wade Carpenter: Well, I think there are some specific laws in certain states as well that could affect it. And I know there said there’s no specific law that covers joint checks, but there are specific contractor laws that could affect this as well as the supplier relationship and who gets paid and all that stuff.
But to wrap this up, joint checks don’t have to wreck your cash flow or your accounting records, if you treat them correctly. They definitely can if we ignore them or you don’t work with your accountant to do that. And the other final point I would make is if you have one of these agreements in place, or I mean, I think the joint checks with suppliers has become even more of an issue with the supply chain issues so people are trying to order stuff up front and making sure they get paid. You need to have a good construction attorney review these things. And just make sure you know what you’re doing if you’re in that scenario, like I said, where you’re the supplier and you’re kind of like the end of the chain and make sure you don’t fall under that joint check rule.
[00:15:28] Stephen Brown: Well, it’s a really important, timely topic too, Wade, because so many of my customers are ordering million dollar plus chunks of materials for storage right now. If they can get it and get a good price on it, they’re hoarding it. And so, a joint check might help that owner go ahead and release that payment for those stored materials.
[00:15:49] Rob Williams: I didn’t, that’s a great point. I didn’t even think about the sub might want to or contract the middle man may actually want this to get it so he can get his money faster. Because I was really thinking about the benefit of the original top of the chain person, but yeah, the middle guy can benefit from this too. Getting paid earlier.
[00:16:07] Stephen Brown: And from my perspective, we’ve got performance and payment bonds that we issue. Performance comes with a payment bond. So I deal with the payment claim issues when someone doesn’t pay their suppliers or pay their subcontractors. And then from my other perspective, when you talk about joint checks, I think joint control over checks, dual signatures. That’s what we talked about early on because we write employee dishonesty. Crime coverage. And that’s one of the key things you have to have in place to get that coverage. So joint checks as far as controls with suppliers and liens, and what the different states allow you to do, I think that’s a good point and check with your attorney. Not only to read the agreement that you sign, but make sure it’s legal in your state.
[00:16:51] Wade Carpenter: Yeah. Well, again, we’re not talking about joint checking accounts. We’re not talking about what Stephen was saying. Paying for pot.
[00:16:59] Rob Williams: Yeah. Either paying your chiropractor or buying pot with it.
[00:17:03] Stephen Brown: Yeah.
[00:17:04] Wade Carpenter: I hope this has helped somebody. We see them quite a bit in some industries.
[00:17:09] Stephen Brown: –do too.
[00:17:09] Rob Williams: Well, great. Well, this was a great episode for the Contractor Success Forum today. Thank you guys. We have Wade Carpenter, Carpenter and Company CPAs. And Stephen Brown with McDaniel Whitley bonding and insurance agency. And Rob Williams, me, with IronGate Entrepreneurial Support Systems. And don’t send me any IronGate RFQs because we don’t build iron gates.
So thank you very much, everybody have a great day and think about how to deal with your joint checks in construction. And send us your topics. We’re always looking to know what you, our listeners, want us to talk about. Because that is why we’re here to help you guys.
So make some comments, send some suggestions Contractor Success Forum dot com or Contractor Success Forum on LinkedIn. Send us your information and your ideas. Thanks. Have a great day.