Paid-when-paid contract - Reasonable Time 10

[ME27272727]

Hello. I'm a self-employed consulting engineer. In the building design and construction world, many contracts are typically "paid-when-paid" terms, with some wording stating that invoices will be paid in a "reasonable time-frame" to circumvent payment protection laws. I'm looking for opinions and experience on what constitutes a "reasonable" time-frame. 30 days? 6 months? A year? It's a good, reputable client of mine that is starting to approach 6 months past due on a big invoice (big for me anyway). It's always fun trying to strike a balance between maintaining good relationships while not being a push-over !

 

[Settingsun]

6 months is too long. Even 90-dayers are clients you should ditch if you can replace them.

 

[BrianPetersen]

Some jurisdictions have introduced laws concerning prompt payment, at least in some circumstances.

https://gowlingwlg.com/en/insights-.../getting-ready-for-prompt-payment-in-ontario/

 

[Ron247]

A company with a standard 90 days is the longest I have ever had to wait. They did not care what your invoice says, it is 90 days. At the same time, I also bought material from them due to my business. Their payment terms for me to clear up my invoice was 30 days. After 30 days, they started sending out NastyGrams. I never thought much of the company even though in those days, I had very little choice in doing business with them. I have always felt your "Pay Me" policy should match your "Pay You" Policy. What is your Client's "Pay You" terms?

Your 6 month Client is possibly a slowly sinking ship. They are slowly losing money and therefor have to put off paying overdue invoices. I would seriously talk to them. I have run into this in construction numerous times. They start a new job and pay the framer from the last job with money from the current job, the drywall contractor from the last job with drywall money from the new job. The most they can survive is one complete construction cycle before they go belly up.

I am not familiar with "paid-when-paid" but if it is what is sounds like, that is a really bad policy to accept as legitimate terms. Sometimes terminology gets confusing. I was going to open up an "All you can eat restaurant". I was going to give customers 1 plate of food with meager portions and then tell them, "Like the sign says, that is all you can eat". Another thought was selling poorly made items with a Lifetime Guarantee. But as soon as the item quits working, I tell them, "Well that is the end of its life".

 

[phamENG]

I am not a self-employed engineer, so give this as much credit as you feel it deserves:

A "paid-when-paid" contract is a means of transferring risk downstream. Each member of the design team is responsible for putting up the necessary capital for the performance of the work with essentially equal risk for loss - if the owner doesn't pay, then nobody else gets paid. Otherwise, the prime consultant (let's say it's the architect) has to put up all of the capital. If the owner fails to pay, they still have to pay you, putting them at greater risk for loss. So going back to fundamental economic principles, the profit should be allocated along roughly the same lines as the risk exposure. In other words, you should be entitled to a bigger slice of the pie if you're going to sign a "pay-when-paid" contract because you're sharing in the risk; you should be willing to accept a smaller slice of the pie if you're foregoing the risk in favor of a "guaranteed" payment contract.

 

[Ron247]

Thanks for that phamEng. I have seen the term once or twice on someone else's contract, but the contract itself did not spell out what it meant. I always took it to mean, "You get paid, when I pay you". That is what I meant by terminology getting confusing at times.

Based on that definition, I would expect the person who hired me to keep me posted on their attempts to get paid by the end customer and why we have not been paid yet. It still sounds like there is a slowly sinking ship out there that is someone's direct customer.

 

[JAE]

Here's a couple of articles - one from New York, and one from Ohio - that discuss "pay when paid" and "pay if paid" concepts:

https://www.acslawyers.com/pay-when-paid-vs-pay-if-paid-clauses-mystery-vs-myth/

https://www.thompsonhine.com/uploads/1137/doc/Construction_Laws_and_Customs_Ohio_-_Feb0.pdf

 

[phamENG]

Thanks, JAE. Looking at those, it sounds like my description is more appropriate for a "Pay-If-Paid" scenario specifically, but still applies to a lesser extent to "Pay-When-Paid." Especially as an independent engineer, the difference between 30 and 90 days can make a big difference in your ability to operate (or, in extreme cases, possibly the ability to pay your mortgage). So if your standard is to get paid within 30 days but the architect is forcing you out to a 90 or 120 day max, you're still taking on some of the risk (if only in the short term). In terms of the profit-for-risk concept, I'd say you should at least get enough to cover an equivalent interest on the money owed to you for the period being considered.

 

[glass99]

I specifically exclude pay when paid in my standard terms and conditions, which is something my old firm always did. Even if they generally don't float you the money, it protects you when your client's client doesn't pay (as has happened in the past).

In the commercial construction world, the contractual requirement is usually 30 days, but the reality is usually about 90-115 days for payment of consultants. I start getting really cranky after 90 days, including stopping work and writing escalating emails to people above them etc.

Even though I have dealt with some really skeezy and poorly financed developers and contractors, my record was 1921 days which was from the NYC Department of Design and Construction.

 

[glass99]

Some jurisdictions have introduced laws concerning prompt payment

They introduced something like that in Australia in the late 90's. It just seems so simple and common sense. The US is a little third world in this respect. The law of the jungle!

 

[IRstuff]

The US is at the point where anything that prevents rampant and unbridled greed in business is labeled socialism. We pay more for our drugs, internet, and phone services because profit is king in the US.

TTFN (ta ta for now)
I can do absolutely anything. I'm an expert!

https://www.youtube.com/watch?v=BKorP55Aqvg

faq731-376 forum1529 Entire Forum list

http://www.eng-tips.com/forumlist.cfm

 

[phamENG]

IRstuff: such is the hazard of living in an oligarchy.

 

[Brad805]

A client who does not have a large enough credit line to cover engineering costs is too large a risk. 6mo is terrible. Let me guess, you are not charging interest either?

 

[BrianPetersen]

We've found it virtually impossible to actually charge interest, even when a payment was months overdue. (At that point, we're generally happy enough to get paid at all ... but this gets taken into account for future business dealings.) Fortunately, I'm in a position in which most clients are repeat clients who want to continue to do business. Every once in a while, someone forgets to submit something, or forgets to forward an email, or forgets to write a PO number on an invoice (or forgets to write our job or file number on their PO, so that accounting on our end can't cross check it). It's hardly ever due to intentional malice, except when the company (our customer) was in the process of going bankrupt ... which has happened a couple of times.

Waiting 60 days for payment seems to be the norm. More than that is when admin starts sending inquiries.

 

[glass99]

has anyone ever used a mechanics lien?

also: does anyone use mobilization fees as way to combat this?

 

[jari001]

You should call them just so they don't forget they haven't paid you yet! I'm not self employed, but I can't imagine any size business waiting on a big payment at the end of the year with no heads up from others as to when it might show up. Just my 2 cents.

 

[IRstuff]

There used to be an apocryphal story at a previous job that Accounts Payable simply wouldn't open anything that looked like a bill at certain times of the year so that everyone could truthfully state that they hadn't seen a vendor's bill

TTFN (ta ta for now)
I can do absolutely anything. I'm an expert!

https://www.youtube.com/watch?v=BKorP55Aqvg

faq731-376 forum1529 Entire Forum list

http://www.eng-tips.com/forumlist.cfm

 

[EngDesServices]

Our payment terms are structured by the size of the PO we receive. These don't always end up being the final terms, as we're willing to modify payment timelines for our larger clients simply because they provide a large percentage of our business.

Anything under $25,000 is NET30.
Anything between $25,000 and $50,000 is NET45
Anything over $50,000 is NET60

When doing work as a sub-consultant, our terms are typically the same as above except for in cases over $50,000 there are clients who add a clause stating we get paid within 7 days of them being paid by their client.

I've only ever had one problem receiving payment and it was a $500 backflow preventer inspection and we're going on four months without payment now.

I'd consider anything under 60 days as reasonable.


Michael Hall, PE (TX) PMP - President
Engineering Design Services LLC

http://www.engdess.com

 

[gte447f]

For structural engineers working as subconsultants to architects, unfortunately pay when paid contracts are the norm for almost all projects with any decently sized or organized architecture firm. Even if it is not a part of your explicit contract, the practice is so ingrained into architects that they will still not pay you until they get paid and they will think that any argument against such a practice is utterly absurd.

They problem is that architects (and engineers for that matter) allow themselves to be utterly taken advantage of by project owners. Owners pay construction contractors promptly in accordance with signed contracts and state prompt payment laws. If they don't construction contractors simply walk off the job. Architects and their subconsultants are due the same consideration by contract and by law, but they simply don't demand that the owners fulfill their obligations.

As a subconsultant I have always just simply waited inline patiently for payment. The average is probably around 60-90 days, probably closer to 90. As subconsultants, engineers depend on the architect to basically act as our agent/advocate to faithfully negotiate collection of payment from the owners on our behalf. They aren't very good at it. Currently, I am fed up with these owners not paying and these architects not demanding that they pay. What else can we do? I am leaning toward negotiating Net 30 payments for invoices under a certain threshold, but I don't expect to have any success getting architects to accept that, because it puts them at risk. Another strategy is to negotiate a right to suspend services for non-payment at a certain number of days. This I think has merit, because it doesn't put the architect at risk for the payment, but it establishing my right to manage my own risk.

 

[JStephen]

IRStuff- the story I heard long ago was this family is getting bothered by a particular creditor, and so they tell him, "Each month, we put all our bills in a hat, draw them out one at a time and pay them, until we run out of money. If you keep bothering us, we won't even put yours in the hat!"

From contracting (not engineering) experience, it is possible to negotiate different payment terms. Whether that works depends on how essential you are, how big a piece of the overall project you are, etc. In contracting, this also comes up in retainages- you may do your little piddly part of the contract, then have to wait another two years for the whole thing to wind down to get your retainage out of it.