Big battle brewing on dead-beat general contractors

Chip Shields

With cash flow as vital as it is to our industry, it only takes one instance to hurt a company,” said Maurice Rahming, president of Portland-based subcontractor O’Neill Electric.

Big battle brewing on dead-beat general contractors

"Civil war is breaking out in Oregon's construction industry"....

That's from the Daily Journal of Commerce last week. They were writing about a related bill on retainage, but it's all part of the Oregon Senate Democrats effort to make sure small business contractors get paid on time.

Prompt payment keeps living-wages flowing. But general contractors who game the system and drag out payments to their subs are putting these subs' employees out of work.

SB 890 on prompt payment is scheduled to move out of my small business protection committee to the Senate floor on Monday.

The fight to pass SB 890 and the retainage-modification bill SB 657 is turning out to be quite a battle with NECA (union electricians), the Independent Electrical Contractors (nonunion), the Associated Building Contractors (nonunion), the union Building Trades Council and the National Association of Minority Contractors on one side vs. the Associated General Contractors (AGC) in opposition...

From Nick Bjork's story in the Daily Journal of Commerce on SB 890 (sub. req'd):

Sen. Chip Shields, D-Portland, is promoting SB 890, which would require general contractors to pay subcontractors in a timely fashion and prevent repeat offenders from working on future public projects.

“Is it much to ask in this great state of ours for people to pay their bills on time?” Shields said earlier this week during a hearing in front of the Senate general government, consumer and small business protection committee. “I don’t believe it is.”

Over the past few years, subcontractors have noticed that a small number of general contractors have been using a loophole to defer payments.

Basically, subcontractors are paid for every 30 days of work between 30 to 60 days after completion. During this time, a general contractor sometimes changes its process for submitting pay paperwork without telling the subcontractor. Once that payment period has elapsed, the general contractor can withhold payment because paperwork wasn’t submitted correctly.

Under state law, general contractors then gain an extra 120 days to pay. Some of these delays result in lawsuits in which the general contractor argues that it doesn’t owe any money at all.

“The large majority of (general contractors) would never do this, but there are a few bad apples out there, and with cash flow as vital as it is to our industry, it only takes one instance to hurt a company,” said Maurice Rahming, president of Portland-based subcontractor O’Neill Electric.

Rahming added that banks and bonding agents consider the avoided payments as unreceivables, which hurts not only a company’s cash flow, but also its business relationships.

Even people who testified against SB 890 at the hearing acknowledged that general contractors should be required to make payments in a timely manner. But John Rakowitz, a spokesman for the Associated General Contractors’ Oregon-Columbia chapter, said the issue should not be handled at the legislative level.

More after the jump.

“This puts state agencies in the business of policing the relationship between (general contractors) and (subcontractors),” he said. “And given the legal and technical portions of this bill … we just don’t believe it’s been vetted out with the (perspectives) of the entire industry.”

Rakowitz also noted that certain types of firms profit in boom times, while others perform better when business is lean. The AGC doesn’t like to support legislation being pitched in reaction to economic conditions, he said.

“It seems like we could solve this within the industry,” he said.

But Shields disagreed.

“This bill has nothing to do with advantages to specific firms; it’s simply about the fair use of public dollars,” he said.

The bill would require a general contractor to pay a subcontractor within 30 days after it submitted a request for payment. If a general contractor wanted to change the contract, or the process of submitting paperwork, it would be required to give the subcontractor 45 days notice.

A general contractor’s first violation of the rule would result in a warning, which would be expunged from the record if the firm were to avoid another violation in the next five years. A second violation would result in the contractor being removed from the state’s preferred contractor list. A third violation would result in a one-year disbarment from work on public projects.

Rakowitz said a number of questions would need to be answered before his organization would support a bill. He wants to know if the bill would take into account instances when general contractors aren’t paid, or expected price changes when general contractors provide their own materials.

Shields, meanwhile, is continuing to push the legislation.

“We’ve got some work to do on this; there is no doubt about that,” he said. “But I believe in this and think it’s exactly what this committee should be doing. I want to move it to session within the next few weeks.”

An earlier version of this story erroneously reported that Columbia Wire & Iron Works went out of business in part because of delays in general contractor payment. Columbia Wire & Iron Works is still operating and currently has a staff of about 35.

Comments

  • (Show?)

    Do small business a simple favor, by Jeffrey Leonard

    But for millions of small businesses that supply billions of dollars of goods and services to America’s largest corporations—business-to-business or B2B sales, as they are known—another insidious trend over the past two years has cropped up that further undermines small business’s ability to invest in new job creation.

    The trend has to do with cash flow. In bad times, all companies, big and small, seek to husband their cash by collecting their accounts receivable as fast as possible and honoring their accounts payable as slowly as possible. What is different in this downturn is that, thanks to structural changes in industry supply chains, large firms now have vastly more clout to engage in such behavior than small ones do. In fact, many large companies today have simply announced that as a matter of policy they will be paying their bills late—sometimes as much as four months late. This in effect forces small businesses, which really are hurting, to make free loans to big businesses instead of being able to use their working capital. As the CFO of one small business that we invested in says about his company’s subcontract work with big aerospace companies, “They basically have their whole supply chain of businesses like us helping to finance their business.” His company was told recently that for any new work from its largest customer, they will have to wait ninety days rather than the customary thirty days to be paid. What is interesting about this phenomenon is that America’s large corporations don’t generally need this money—statistics show that they are sitting on nearly $2 trillion of idle capital on their balance sheets.

    This past November, the Washington Monthly spoke with more than a dozen Inc. 500 companies, and the majority reported experiencing extended payment terms. Indeed, as we dug into the matter, we found more and more evidence that the practice of unilaterally changing the terms of trade is widespread in corporate America.

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      I agree with SB 890 and SB657 that when GC hold back payments from small business it strangles our cashflow. I had this happen to me on several projects, it makes it really hard to operate when you can't count on payment coming through and when you get strung out for months even when you work is completed at the very beginning of the projects. It would be good to see the changes for prompt payment fromt he owner to GC so that it doesn't cause cashflow problem. We can continue to move forward and grow as all business would like to do. But when you don't get prompt payment it makes it really difficult. The small business ends up paying for borrowing money so you loose profit when your trying to make money not loose out. Thanks Senator Shields for helping the small businesses who make up large portion of our economy.

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    Seems to me that this is a place where the Golden Rule should apply.

    If you'd like to get paid within 30 days, then pay your own bills within 30 days.

    Writ large, the economy works best when money flows quickly through the system -- allowing people to react in real-time to events, where those are events in their own business, their community, their industry, or globally.

    It's sad and pathetic that we need to legislate this sort of behavior, but if there are companies out there that are going to behave in predatory ways, well, the state should step in to preserve the orderly functioning of the free market.

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    Seems to me the Subs have a pretty good idea who the jerks are, so why don't they just refuse to work for them. Also, why don't they just change the contract to specify that the requirements for submitting a bill to the GC are as stated in the contract and cannot be changed during the course of this contract.

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      Micheal, as much as I'd like your idea to work, there are just too many competing contractors out there for it to work. That was one of the things I didn't like about commercial construction (I was involved in the construction industy from 1985-2008 full time as a tile/stone/mosaic worker), my family's been involved in the trowel trades for over 100 years (most in Portland), and I still have several relatives who are contractors or work for contractors in the area.

      The reality is for subs is that unless you do some very rarified work where there is almost no competition, you go with the general's contract or they tell you to take a walk and go with the next sub down the list. Been there done that.

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    I'm wary of legislation to fix anything but believe it comes to that when individuals, businesses and organizations can't find the ability to address these challenging issues themselves.

    The larger issue is that small construction companies and small businesses in general are the most vulnerable to this bad economy. After several years of it we've used up our personal and business resources. Unlike large companies we lack access to capital and have no reserves left to pull from. When we don't get paid we go out of business. We generally don't have the financial resources to react in any way to the damaging behavior of prime contractors, whether they be public or private owners. My company is a member of the AGC through an effort by the Port of Portland to support and encourage small business and the AGC maintains a committee to encourage and support small business. That the AGC is not taking stronger action to support small business by recognizing that some of its own members are being severely damaged by the actions of other members is a problem I hope they will address.

    The AGC Small Business Growth Opportunities committee is trying to address many different behaviors of primes and GCs that strangle small companies: late payments; shenanagins that delay payment; poor project management; indifference to the challenges of small companies even while "encouraging" them (particularly destructive to MWESB firms).....

    I'm on the fence with legislation but if the AGC is opposing these bills then the AGC should step up and make real effort to make them go away.

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