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September 27, 2010

New Law Promises Help For Subcontractors | Onus is now on general contractors to pay up

Photo/Courtesy CASH FLOW: Susan Mailman, president of Coghlin Electrical Contractors in Worcester, is hopeful a new state law will keep outstanding bills from mounting.

For Susan Mailman, president of Coghlin Electrical Contractors, the scenario is a common one.

Coghlin gets a job handling the electricity for a construction project, gets the work done and then sits for 60, 90, even 120 days, waiting for the general contractor that hired the company, and the developer that hired the general contractor, to move the paper to get Coghlin paid. When something doesn’t go as planned, requiring “change orders” to switch materials or wiring techniques, it gets even worse.

“If there’s $10,000 worth of change orders, we’re getting these calls saying, ‘How about if we give you five,’ ” Mailman said. “They’ve held our money for so long, they have a little stick over us.”

Mailman and other Massachusetts subcontractors are hopeful that all this is changing. The state’s new prompt-payment law, which goes into effect Nov. 8, sets specific timelines that developers, contractors and subcontractors must follow for most projects worth $3 million or more. But while the subcontractors see the law as a watershed, some general contractors argue its impact will be limited and may involve higher construction costs and bigger risks for developers.

The prompt-payment law sets a 15-day timeframe for approval or rejection of subcontractors’ requests for payment. It also creates rules on how quickly subcontractors must submit those requests and how quickly a check actually goes out. Altogether, firms need to get paid within 90 days of the start of their work.

Credit Crunch

The major force behind the new law was the Associated Subcontractors of Massachusetts. ASM has been pushing for this sort of legislation, versions of which were already on the books in 32 other states, for five years. But, according to CEO Monica Lawton, the tight credit market makes it more necessary than ever.

Up until now, Lawton said, subcontractors have been forced to hang on, buying materials and paying the employees who do the actual work on a project, for however long it takes to get paid. That can mean relying on working capital or getting a bank loan.

“In essence, that makes the subcontractors the banks for the project,” she said.

William J. (Mac) Lynch, of Worcester plumbing and HVAC subcontractor William F. Lynch Co., said his company often has to make changes in projects midstream and then doesn’t get paid for the new work until the end of the project, often a year or more later.

“At that point, we’re bargaining from a position of weakness,” he said, adding that clients often expect him to agree to a discount. “It’s not economical to take them to court to get the money.”

And, Lawton said, if it takes too long to get paid, subcontractors can end up hurting their credit, having a hard time getting new loans, and not being able to get started on new jobs.

Lawton said the law should be a good thing for the property owners who hire contractors as well. With a guarantee for rapid payment, subcontractors won’t need to build cushions into their budgets, and they’ll be able to keep prices down.

But Anthony Consigli, president of general contractor Consigli Construction Co. Inc. in Milford, said the way he sees it, the need for a cash cushion is just being shifted upward. He said companies like his will need more working capital on hand so they can pay their subcontractors even if owners don’t pay them on schedule.

“As much as everybody has good intentions, things will sometimes go wrong with the payment process and you may need capital,” he said.

Building Relationships

In any case, some say the benefits of prompt payment were always available to those construction clients that had a good record.

Paul R. Bottis Jr., physical plant director at Clark University in Worcester, said he doesn’t expect to see much change from the law because Clark always had a policy of making payments within 10 to 15 days. He said that’s led to better bids from contractors.

“We generally get very good pricing because we’ve always been very good payers,” Bottis said. “They know they’re not going to have to chase us for their money.”

But many companies will need to make some changes to follow the new law. Robert Petrucelli, president and CEO of the Associated General Contractors of Massachusetts, said some developers, contractors and subcontractors will need to buy new software and spend more on administrative work to track payments, adding to projects’ total costs.

Petrucelli said the law also creates more uncertainty for owners and general contractors by making it easier for subcontractors to walk off a job if they don’t get paid — even if it’s because they failed to do their jobs properly.

That could lead to problems with small companies that aren’t as worried about building long-term relationships as the large contractors are.

“The intent of the law by the subcontractors is to protect the very good subs from the very worst general contractors and owners,” Petrucelli said. “But it does nothing to protect good owners and contractors for the worst subcontractors.”

Many questions remain about what the law will mean in practice. At information sessions that his organization has been holding, Petrucelli said members frequently bring up questions that simply aren’t addressed in the legislation, and it may take legal action to sort everything out.

There are also issues that are more a matter of changing the culture of construction work. Mailman, of Coghlin Electrical, said she hopes that the law will encourage general contractors to put liens on new projects to make sure everyone involved gets paid. Right now, she said, that’s something that owners view as a hostile gesture.

“We should be doing it as a matter of course,” she said.

But Consigli said he’s doubtful that will change even with the new law in place.

In general, Consigli said, the law has the potential to both temporarily complicate contractors’ jobs and ultimately streamline their administrative processes, but he’s not ready to make any big claims either way about what will happen.

“I’ve heard that in other states where this legislation has been enacted, there’s been a lot less change than people expected to see,” he said.

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