Arthur Rubinstein is president of Skyline Steel of Brooklyn and is a past president of the Subcontractors Trade Association of New York and the Empire State Subcontractors Association.

Smoother Payment Terms Can Rein in Project Bids

Improvements to contract payment terms can result in enthusiastic and competitive bids by subcontractors.

by Arthur Rubinstein

The hot topic of discussion at a recent meeting of a New York Building Congress committee on construction costs was the concern expressed by real estate developers that the large number of substantial projects in the pipeline for the next few years would result in a shortage of qualified subcontractor bidders at competitive prices.

Maybe it was a good thing that I was present. I told them how I would handle the problem if I were a developer. The issue boils down simply to payment terms. I told them, change the payment terms, and subs will want to work for you at prices you will find reasonable.

Why are payment terms so important? A subcontractor's volume of business is limited by its available working capital and the resulting bonding capacity that it is able to secure. Increasing that capital and bonding capacity removes many of the business pressures that subcontractors face and gives them an opportunity to bid more confidently on jobs.

At the meeting, I outlined for the developers present the major points that can streamline payment terms and get subcontractors on board.

First, developers should commit to pay monthly requisitions within two weeks, without fail. Today, we submit requisitions and typically get promised payment no sooner than four weeks - a timeline that often stretches to five or six weeks. This is a basic professional courtesy that can go a long way toward making the owner-sub relationship smoother.

Second, developers should adopt and implement equitable retainage terms for contract expenditures. One example would be retaining 5 percent of the first 50 percent of the contract, but not keeping additional retainage afterwards.

Upon substantial completion of the work, the owner should promptly reduce the retention amount by half. And once the subcontractor's punch list is completed, pay the retention balance in full and without delay.

Third, the owner should commit to assigning project team members at both the developer and construction manager level to be responsible for reviewing, negotiating, and resolving change orders. Owners should commit to resolving change orders within 30 days in order to allow for payment of the balances during the next requisition cycle.

These are not "pie-in-the-sky" steps, but rather can be implemented quickly and without great duress for the owner. A developer adopting this program would have no shortage of enthusiastic bidders, and would reap economic benefits far greater than the relative costs of added staff and accelerated "drawdown" of construction loans.

If the payment program I've outlined were implemented by all major developers in New York City, it would increase the available working capital and bonding capacity for subcontractor companies. Those companies in turn would be able to meet the market's needs, benefiting subcontractors, contractors, and developers - and the real estate and construction industries as a whole.