All in Agreement
Patty interviewed and hired a full-time bookkeeper so she could be a stay-at-home mom. Although residential business had slowed a little, John and Patty decided it would be a good time to expand into the light commercial market. They met with their banker, insurance agent and CPA to discuss the business expansion. The banker provided John and Patty a line of credit and the insurance company did a fine job making sure that they were protected. With financing and insurance in place, the CPA encouraged John and Patty to move forward with their plans.
It took John a few months but he soon landed a retirement home job. The retirement home was related to residential so he felt very good about it and was confident in his pricing and his company's ability to do the job. The contract price was $320,000, which was equivalent to 12 or 15 of his normal house jobs. John and his foreman were really excited about breaking into commercial work. They spent time pre-planning, as well as trying to get the best material prices. They spent time with the GC's superintendent trying to develop a good working relationship with him. They would stop by the job to check on the jobs progress because they wanted to be prepared.
John was then invited to attend his first on site subcontractor meeting. He told Patty that the GC asked him to attend the sub-meeting. Patty could see that familiar proud twinkle in John's eyes that she had grown to love. She knew that look and had seen it each time John had experienced a new success in his life. She knew in her heart that John was very capable and she had total trust in his ability.
Two meetingsThe meeting was attended by foreman and in some cases, the owners. Introductions were made and when they got to John, he had a big beaming smile on his face. He introduced himself and his foreman, and mentioned how happy he was to be working on this job. He also let everyone know that he would be glad to help any of the other trades if he could. The meeting went great and John came home proud as a peacock.
John didn't know it yet but this day would be a very special day. In the early morning, Patty woke John up and said, "It's time, my water broke." They dashed to the hospital and in the morning, baby Steven was born.
Later that week John took his signed contract for the retirement home to his banker and they both looked it over. The banker wanted a copy of the contract for his file. John had a $100,000 line of credit with the bank and he planned on using that until his first draw. The line of credit was designed to go up and down. When John received a payment the funds would first go to pay down the line of credit. John figured the job would take him four months to complete. That would mean he would have roughly four billings and receive four payments less 10-percent retention.
Payment oneThe first month, John billed the GC $100,000 for the work in progress. The GC cut the billing back to $91,000 because they felt John wasn't as far along as he had billed for. John's costs to date were only $75,000 and he felt he was doing well so far. Production was only going to get better. Even though the GC cut his pay by $9,000, John wasn't really concerned. John made a point of stopping by the P.O. Box each day to see if the $91,000 check had come in. He waited an additional three days past the due date and he called the GC and explained that he had not received a check yet. The GC explained that the owner hadn't paid them yet, but they should have it by the end of next week.
John was thinking that he could sure use the $9,000 that the GC had cut out of his bill now that he hasn't been paid on time. A week had passed and John had still not received his $91,000 check. He called the GC again and the GC told him that they should have payment any day now.
Contractually, John had no choice but to kept his crews working on the job and had exhausted his line of credit. He explained the situation to his banker and the banker suggested that John use some of his savings until he got paid. John talked to Patty about it and Patty agreed that they should use some of their own money. John took $50,000 out of savings and paid down his line of credit.
Payment twoJohn's next billing totaled $185,000 of which $91,000 was last month's bill for which he had not been paid. Currently, the GC owed John a total of $185,000. Other than not getting paid on time, it looked like the job was making good money. So far, he had $125,000 in costs and $185,000 billings. He was $60,000 ahead but he was concerned because he hadn't been paid and he didn't want to talk to Patty about tapping their savings again.
The GC's first payment to John was now 45 days past due. He called and the GC told him that he and the owner were having some problems but they would soon be worked out. He said that some of the other subs were over-billing and not getting the work done fast enough. The GC told John that he really needed John's help in getting the job done sooner. He asked John if he could add more workers and John told him he would do whatever he could to help.
John knew at this point that he needed to tap his savings but he didn't want to tell Patty about it because she would just get upset and start worrying.
John decided to transfer another $50,000 from his savings into the bank line. John had used all of his savings at this point. John hired several more good workers and realized that if he kept up this pace, he would be 80-percent complete or more on his next billing.
Payment threeJohn was the type of guy who always paid his suppliers on the 10th of the month and took his discounts. It was time to bill the job and he prepared a bill for $275,000 of which he had $189,000 in costs, which left him a gross profit of $86,000. The bank line was at $100,000 and he had taken $100,000 out of savings, which left him only $11,000 for next week's payroll. He called the GC and told him that he had to get paid right away. The GC told John that the owner had still not paid, but would see what he could do to help.
The GC called John back and told him that they had a check for $25,000 waiting for him to pick up. The GC also said he was very sorry for the slow payment but not to worry and that the owner will get everything caught up in a couple of weeks at the most.
The GC had used its own money to pay John the $25,000 to keep him working on the job. However, John thought the money had come from the owner's payment to the GC. The $25,000 plus the $11,000 he had left would give John enough money to finish the job.
John and his crews completed the job at a total cost of $ 210,000, leaving him a gross profit of $110,000, roughly 34 percent. The problem John was having is that he had only been paid $25,000 after spending $210,000. He owed the bank $100,000 and he owed himself $100,000. To make matters worse, he was starting the drywall on three large homes and he didn't have any more money.
The bad newsJohn had been off the job a few days when he heard that the GC on the retirement home had stopped work. John called the GC and the GC told him that the owner still had not paid and that the GC couldn't afford to keep the job going. The GC told John that he should talk to his attorney. John called his attorney and was advised to file a lien. He did so and then he called his banker to see if he could get some money for the three houses. The banker told him that until the line of credit was paid off or down the bank couldn't help him.
John wanted to tell Patty about his problems as well as the money he had taken out of their savings. He just couldn't bring himself to tell her that things were falling apart. He decided against telling her in hopes that something would change. Nothing changed. It only got worse.
Then John received a call from his attorney telling him that the owner of the retirement home filed for bankruptcy and that the bank was foreclosing on the property. The attorney went on to tell John that when a bank forecloses on a property the liens are null and void. The attorney explained to John that his chances of collecting any money were very unlikely, because he had signed a "paid-if-paid" contract. He explained that when John signed the "paid-if-paid" contract, he agreed that the GC was not liable for payment unless the GC received payment from the owner. In this case, the GC did not receive payment from the owner.
The first thing that went through John's mind was what Patty was going to think of him. He would probably have to sell her dream home and start over. He wondered how he was going to break this news to her. Other than his house he was now broke. John didn't have to break the news to his wife because the bookkeeper did.
Patty confronted John about what the bookkeeper had told her. She couldn't believe that John had gotten them into such as mess. She couldn't believe that John would take their hard earned savings without at least talking to her about it. Neither of them knew what to do other than to sell the house.
John lost the other house jobs he had, as well as his crews. He started selling his equipment to make a couple of house payments. If the house didn't sell soon the bank would foreclose. A black cloud of depression hit John hard and before long he wasn't coming home or talking to anyone in the family. He blamed himself for getting into such a mess and could not see a way out. John and Patty finally sold their home and were left with very little after all the attorney fees, closing costs and late fees.
John basically told Patty to take the money that was left and do whatever she wanted. He told her that he was going to get a job and would send as much as he could each week. Patty agreed and moved in with her sister about a 100 miles out of town.
In a matter of a few months, Patty's dream home was gone, as well as her husband and their plans for more children.
Can a dream end?John and Patty's dream ended the day John signed that contract. The contract John signed included a "paid-if-paid" clause, as well as a clause that required John to keep working whether he was paid or not. In other words, he couldn't stop work because of non-payment nor could he legally force the GC to pay him because the contract protected the GC from having to pay John unless the money first came from the owner.
These clauses are dream killers and they strike families NOT businesses. The biggest thing John did wrong was to sign the contract. The minute he signed that monster without getting legal advice he was out of business without knowing it. An attorney may have advised John about the "paid-if-paid" clause as well as the contract requirement that John keep working even if he was not paid. I'm sure John and Patty never gave a thought to how a contract could change their lives.
John's reward for doing an excellent job was a personal and financial disaster, and it was done legally. What may be legal is not always ethically or morally right. Subcontractors and their families deserve fair contracts.
Remember: Teamwork begins with a fair contract!