Financials and budgeting

Paying subcontractors: How to simplify the process

A subcontractor, a calendar with a red square highlighted, and a stack of dollar bills

Construction project management is inherently labor-intensive. Construction companies are managing seemingly never-ending data, documents, deadlines and deliverables.

That’s why project management software like Buildertrend is so important. Our platform provides a solution for the organization and success of your business.

Even with all our helpful features, you still need to know the rules of the road. It’s especially important that builders stay up to date on subcontractor payments to maintain important relationships, abide by prompt payment laws and keep projects on track.

In this blog, we’re exploring the most important factors surrounding the payment of subcontractors. From there, you can simplify your payment processes to get subs paid – and work done – faster.

How do you pay subcontractors?

There are several ways home builders can pay subcontractors for completed work:

  • Cash
  • Check
  • Digital or e-check
  • ACH, credit or debit

Of these, some are more recommended than others. Paying in cash, for example, can create tax risks and be harder to track and audit. Paper checks can be lost in the mail and can tie up cash flow if they are slow to clear. Secure, electronic methods of payment, such as ACH, offer faster processing.

It’s important to accurately track and fulfill these payments throughout the construction process to ensure timelines stay on schedule. This can be accomplished by using construction purchase order software to anticipate and track costs, support job costing and ensure a positive cash flow throughout each construction phase. 

How long does a contractor have to pay subs?

A subcontractor’s payment schedule may vary depending on local laws and regulations or the terms of the agreement. Typically, there are three common scenarios for subcontractor payments:

  1. Progress payments. Subcontractors receive payment once a portion of work is completed, even if there is more scheduled work. These milestones are usually outlined before work begins.
  2. Completion payments. Subcontractors receive payment only after all subcontracted work is finished.
  3. Owner-dependent payment. Subcontractors don’t receive payment until the homeowner pays. In a construction contract, this is often referred to with language like “pay-when-paid” – meaning subcontractors are paid when the home builder is paid – or “pay-if-paid” – meaning if a home builder doesn’t receive payment from the homeowner, the subcontractor also isn’t paid.

To build your own subcontractor payment schedules, start by first understanding each step of the agreement process.

Payment terms

Construction payment terms help strengthen subcontractor agreements. These documents are used to clarify when and how subcontractors are being paid. This includes the:

  • Scope of subcontractor work
  • Estimated payment amount
  • Payment schedules and dependent work

Payment terms should also detail how many days a home builder has to complete payment after an invoice is received. Payment terms may depend on payment laws.

Payment laws

There are two ways to determine how long you have to fulfill a subcontractor payment:

Prompt payment laws depend on how your project is being funded. Is it a federal, state or privately funded endeavor? Compare these laws to the contract you signed to see if they align.

This is where things get tricky: Some states’ prompt payment laws override any other agreement, while others apply unless otherwise agreed. Most state laws determine that contractors need to pay subs within 7 to 14 days of receipt of payment from the project owner.

Being well-versed in prompt payment laws and contract clauses is one of the best skills to have in your business tool belt, whether you’re a general contractor or a subcontractor.

Invoicing

An invoice is a document that details construction work completed for a specific project or time period, depending on the agreed-upon payment terms. Invoices should include completed work, materials purchased and change order details.

Construction invoicing software connects purchase orders being sent by the home builder with invoices being sent by the subcontractor for one easy-to-track payment cycle.

That process might look like this:

  • A construction company sends a purchase order to the subcontractor, detailing scope of work, materials and supplies needed for a project
  • The subcontractor sends invoices to the home builder detailing the exact cost of services or materials purchased
  • The construction company fulfills payment based on payment schedule terms
  • The construction company invoices the homeowner for services completed based until all payments are complete

Verification

Some subcontractor agreements may have terms included that delay payment until subcontractor work can be verified. For example, an invoice from a plumber might not be paid out until the work can be checked for leaks or quality. If water is turned off for a phase of construction, this means the plumber may not be paid until the property’s water is turned on, even if that is after the deadline outlined in the payment terms.

It’s important to communicate with your subcontractors about any terms that might cause delay in payment to ensure you maintain a good subcontractor relationship and prevent any claims of non-payment.

Payment method

Avoid any miscommunication about how subcontractors receive payment by including payment methods alongside payment terms.

If an online or ACH payment is the preferred method of payment, for example, specifying it in the payment terms ensures the construction company has all necessary account information to complete the ACH transfer. It also means subcontractors know where to look for incoming payment, eliminating confusion and delays related to payment completion.

Taxes

Subcontractors are responsible for reporting their own revenue and expenses in relation to local, state and federal income tax rules. Home builders should file a 1099 for all work exceeding $600 to ensure proper tax compliance.

Subcontractors are also typically responsible for paying sales tax on materials and supplies for a project, although those costs can be reimbursed by the home builder if they are included as a part of the invoice.

As a home builder, you may want these expenses itemized for budgeting and reporting purposes. Just make sure you’re clear in your payment terms about how detailed invoices should be before subcontractors submit them for payment.

It’s also important to remember that tax regulations vary by state. Some states may include construction labor as a taxable service, while others don’t. Some may define subcontractor services as reselling activities. Be sure you’re adhering to your own local and state laws to avoid having to pay out-of-pocket fees down the road.

Record keeping

To avoid tax issues and payment disputes, keep a thorough paper trail of all payment information. This includes contracts, purchase orders, change orders, invoices and payment records. That way if an issue comes up, you can easily track down information and provide proof of payment – or the reason why payment wasn’t made.

For an even more accurate payment process, use construction payment software. This software helps provide documentation and status updates of purchase orders, change orders, invoices and payments. Plus, it can help you:

  • Understand job profitability
  • Set schedules based on the completion of subcontractor work
  • Easily share documents with office staff, subcontractors and homeowners

Know what to expect in the event of a late payment

There are several common conflicts that can arise in your construction business. However, one of the more serious issues you want to avoid is financial disputes.

Whether the time got away from you, communication was mismanaged or something was out of your control, not paying a sub on time can lead to trouble.

A subcontractor might try to collect payment by sending a demand letter, sending a notice of intent to lien letter, filing a lien or filing a lawsuit.

You want to avoid anything that might taint the relationship you have with your subs, but sometimes mistakes happen. The best way to move forward is to ensure those payments are sent in a timely manner and be prepared to improve your systems in the future.

5 tips to simplify subcontractor payments

This can feel like a lot of information to sort through, but have no fear – Buildertrend can help you simplify subcontractor payments with these tips.

1. Use a payment schedule

Create a payment schedule within Buildertrend around your subcontractor agreements. Once due dates are recorded in the software, you can set up auto reminders for when a payment is coming due. This can help you ensure funds are available when making payments to subcontractors.

2. Consider online invoicing and payment options

Use Buildertrend to create detailed invoices that include contact information, invoice numbers, line items and purchase order details. Save invoices as templates for faster creation in the future and can be set up to complete calculations for you. Make the process even faster with online payment options that allow subcontractors to receive payments by email or accept transfers using a mobile device.

3. Communicate payment terms and expectations

Use Buildertrend’s subcontractor portal to assign purchase orders, receive invoices, store contract documentation, add comments and send messages. This ensures everyone has access to the same information at the same time, reduces requests to resend documents and sets clear expectations (and due dates) for the duration of your contract.

4. Stick to one invoicing method

Although this might depend on your payment terms, try to choose only one invoicing method and stick with it. Consistency helps reduce confusion or missed documents. For example, if you’re sending electronic invoices, try not to send paper invoices as well. This might result in double payments you then have to refund, or it might cause payment delays.

5. Establish a payment approval process

If you have the staff to allow for it, establish a payment approval process where a second person reviews invoices before the first initiates a payment. This type of approval system is especially valuable in ensuring your construction company isn’t overpaying or making a payment in error.

Keep track of payments with ease

The best way to avoid payment disputes is to have a dependable and easy-to-use financial and project management platform at the ready.

Not only is Buildertrend the best construction platform in the game with takeoff software, streamlined estimates and project management solutions, but we also offer a seamless way to pay subs right alongside all the financial features you need with Buildertrend Payments.

Buildertrend Payments helps builders send sub and vendor payments with ease.

Use this tool to:

  • Keep track of and send payments without needing to leave Buildertrend
  • Pull in costs from estimates, selections and construction change orders in a single invoice
  • Pay subs through a simple email with just a few clicks
  • Ensure subs and vendors can receive their payments for free – no fees are required
  • Send e-checks through email, so subs don’t have to have a Buildertrend account to accept payments
  • Enable subs and vendors to select how to get paid
  • Save time and money with process improvements (and flat payment fees)

Check out more of Buildertrend’s financial tools and schedule a demo today. 

About The Author

Debbie Trecek Debbie Trecek is a freelance copywriter for Buildertrend.

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