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October 14, 2013

Letter to the Editor: Subcontractors have always been the bank

I just wanted to clarify a few things from the smaller subcontractor point of view in the article “New city policy has contractors acting like banks” (DJC Oct. 3, by Tymon Berger).

The subs have always been the bank. My company is about 80% sub and 20% prime. I perform 20% residential, 20% industrial and 60% in the governmental entities, (city, county etc.)

I perform many projects with the city of Seattle under the JOC program. The JOC is awarded to the large contractor (primes) and I am the subcontractor who performs sometimes as much as 90% of the work. There are currently two types of JOC contract work with the city of Seattle.

The information in the DJC about how the general contractor is now going to be the bank is not exactly accurate.

Subcontractors have always been the “bank” and carried much more liability than the prime. I know that in order to qualify for the bond as a prime, you need to show positive assets of at least the amount requested to your bonding company. Subs on the other hand are trying to make it on personal credit lines and personal assets. Where is the risk now?

So for the last 13 years, I am the company who has been the bank. No “real” risk was really placed on the general contractor other than normal bonding and payment procedures. Primes always have the subs sign hold harmless agreements, hold money for “back charges” or minimum of 5% for a year, and always transfer blame for scheduling issues to the sub. This practice is common in the public works arena, and I can understand that holding funds is a smart thing to do for the prime. But as a sub in this arena, we are the bank.

The reason I state we have been the bank is that as subcontractors, have to pay our suppliers and vendors within 30-45 days or they begin to freeze our accounts. Try doing business without any paid supplier or vendors on multiple jobs and you have a serious cash flow issue.

Transferring the “payment responsibilities” to the prime will now change the way the game is played for all of us. Primes will have to make sure the subs are providing the quality of work needed to expect prompt payment from the city. Maybe a “prequalification procedure” is needed to ensure all parties are being honest with each other instead of passing the work to a friend or buddy within the subcontractor industry. I believe the city and the prime have an interest in ensuring transparency with all parties.

On the other hand, I have experienced the position of the prime and dealt with the city on several projects over the years.

I have performed large projects with the city and have had positive experiences as long as I am involved daily. My experience with the city has been the “normal contract” portion of the city contract, which is usually paid around 30 days after billing. I have billed the city for “materials stored” onsite, invoiced immediately and received payment within 30-45 days. What takes a long time is change orders and the process the city has in place for final payment on these. I have heard 60-90 days is normal. Change orders can be a game changer and have to be dealt with promptly and I think the current system in place is understandable.

What this new policy has done is actually forced the GC's PM to stay on top of these projects and ensure billing is done quickly and efficiently. When the prime's “money” starts leaving the bank account they pay close attention to cash flow and make sure money is coming in. I think “partial billing” in increments will become normal procedure to within 90% of the original contract and then the change orders will be dealt with later for all. This will perhaps change the game to where the primes and subs will want to keep change orders to a minimum and make sure they hire the right subcontractor for a job in the first place.

This is a step in the right direction for everyone, with a few minor glitches. These glitches can always be worked out as time goes on and everyone gets involved. One thing for sure, it has now shifted the burden to the contractor to make sure they are prompt and are much more involved. I think this is something that should have been done a long time ago.

Roman Richards

RJ Richards CE

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