Thomas C. Schleifer, PhD, has operated a general contracting company, served as a consultant to the surety industry and been a professor at the Del E. Webb School of Construction at Arizona State University. He is currently a consultant and author, most recently, of "Managing the Profitable Construction Business." ENR Deputy Editor Richard Korman interviewed Schleifer in New York City about the risk management aspects of late payments, how contractors can get paid faster and what he learned in his early days as a young contractor in New Jersey.
ENR Let’s talk about late payment terms.
Schleifer I have a belief that our industry doesn’t have a payment problem as much as it has an entitlement problem. As contractors we’ve been getting paid late for so long that everyone takes it or granted. Yet the contract itself says, “to be be paid by the 15th, the 20th or 30th of the month." Whatever it says, it says it definitely.
Does it surprise you that ENR’s own pay survey showed the proportion of late payments staying the same but the late payments getting later?
No. And late payment is a huge number, a huge amount of money that the contractors have invested in the owner's projects.
Some people tell me liens are nice but ineffective. What’s your impression of state prompt-pay laws?
I’m told by contractors in states that have strict, clear prompt-pay legislation, stating that an invoice must be paid in x days, that even public bodies sometimes ignore them. The problem contractors have is that they are under pressure to avoid getting into a fight with the owner, which can cause other problems, so they think or hope that their patience will be seen as cooperation.
What about the experience you mentioned about when you were co-owner of a contractor with your brother in the early 1970s?
We had submitted the low bid to build a community college building from the ground up, a project that at the time was in the $5 million to $8 million range and today might be valued at $15 million. At the first job meeting the architect went through a litany of things he wanted to talk about, such as where’s the schedule, and I want this and I want that.
And at the end he got up to leave and I said, “Can we talk about the payment process?” And he looked at me and said, “WHAT?”
I said, "The contract calls for pay by the 15th of the month."
And his answer was immediate: “The state never pays by the 15th. Forget it.”
And I said, “Well the contract says that, I’d like to know when I’m going to get paid."
“You’ll get paid when you get paid,” he replied.
How did you feel when you heard that?
I had the advantage of naïveté. I didn’t know any better. It was a big job for me and I knew we couldn’t finance months of this project with the schedule we had built in because it was millions of dollars and I didn’t have millions and so pushed to a corner, I said, “Who should I talk to about payment if you won’t talk about it.”
And the architect answered, “Talk to the attorney general,” and he got up and left.
So, I wrote the New Jersey attorney general and said, “Here’s a copy of the contract, here’s what the architect said,” and I quoted him, and I said, “When are we going to get paid, and if I’m not going to get paid by the 15th, I’d like a change order issued for the value of money.”
My reasoning was that paying late changed the contract so I required a change acknowledging that.
And the attorney general wrote to the architect, with a copy to me, saying, “Either pay him on time, or give him a change order.”
And of course the architect was angry and it wasn’t easy in subsequent job meetings. The architect, one of the biggest in the state, accused me of upsetting the apple cart.
What happened next?
In our state at the time there was a multiple prime contracting law, so there were five prime contracts, and everybody else wanted to stay out of the line of fire, but all of us got paid on time every time for the life of the job, sometimes early.
And what else came of it?
I asked other prime contractors about pay practices they experienced and I realized that other than that one job where I made an issue out of it, what happened didn’t change anything. Which is why I say we have an entitlement problem. We have a choice to either expect our money, solicit our money or demand that the contract to be lived up to. The alternative is to allow owners to pay you when they want.
And the consequences of going along with it are…
Once you do that for a couple of months, the contract payment provisions could be considered to be rewritten by adhesion. It may be too late to change.