The trend over the last few years has been for Clients to demand longer payment periods to its Vendors and Contractors. We see many proposed payment terms in the 60 day range, some in the 90 day range, and a few in the 120 day range. Why is this and what does it mean to the industry?
The “why” part of the question seems to be driven by the fact that in slow economic times, it can be done with little negative impact and some tangible benefits. The Client’s cash flow is improved and risk is reduced since more money is being held longer. Since money is cheap and competition is fierce, even the top tier contractors seem willing to put up with these terms (at low to no cost) so Clients continue to get good service from good firms.
A subtle benefit to Clients is the additional leverage it provides in the event of a dispute or problem. Since most contracts are based on 30 day billing cycles, extended payment terms mean multiple billings are “in process” and can be withheld increasing the leverage to force a resolution of a dispute in the Client’s favor.
There may also be subtle benefits from lien rights expiration that can result from extended payment terms. Our home state has statutory lien waiver forms that say payments are “deemed” to have been made in 60 days (even if they haven’t) unless a contractor files a lien or notice of non-payment. Some contractors may decide to waive their lien rights rather than disrupt payments by these filings.
It’s hard to say what this means to the industry and whether there will be any structural changes in reaction to these extended payment terms. Possible options include changes to lien laws, a push by Contractors and Vendors for up-front payments (deposits), or a reduction of the now typical 10% retainage to a lower amount . 0% retainage and 90 day payment terms would typically have more money being held by Client than 10% retainage and 30 day payment terms.
Our guess is that as economic conditions improve, Clients may want to re-think their extended payment terms. Costs will likely increase but these will mostly be lost in the noise about price inflation for commodities and labor. But they will also increase due to the increased cost of money and reduced competition. Contractors and Vendors will start adding money to their quotes for the payment terms because they can. Firms who were previously willing to agree to extended terms may choose to pass on those projects as their work load increases.
We suspect within a year of solid economic times, we’ll be hearing some Clients complain about the quality and performance of their Contractors and Vendors. If you are a Client, that’s one sign it’s time to address your payment (and other) terms that define your relationship with Contractors and Vendors to assure you have motivated and qualified firms for your work.