Volume 38, Issue 1, January 2003


Want to Get Paid?
    Tried and True Strategies for Making Credit Decisions

by Andrew T. Gum

As we navigate the landmines on the battlefields of contract glazing, the risk of not getting paid for a project is arguably the most dangerous ground upon which we walk. The process of how you underwrite the credit that you extend is a critical element that requires discipline and the ability to detach yourself emotionally from a project. Taking the time to remind yourself and your staff of the contract clauses and scenarios that compromise your company’s ability to collect your money is critical to the success and health of your business.

Luckily, we work in an industry where the profit margins are fat and the cash flows like beer at a metal supplier’s golf outing. Since none of these three elements exist anymore (including aluminum suppliers having golf outings) the thought of getting stiffed on a project is especially painful in these tough economic times. As an owner and/or operator of a contract glazing business, the credit that you extend and the health of your customers should always be on your mind. 

Making Credit Decisions
The first aspect of making quality and informed credit decisions is what I call the preventative side. This is by far the easiest part of underwriting. As painful as it sometimes might be, the dinner meetings and activities of your local construction organizations are a great way to keep your ear to the ground. A general contractor who is not paying its subcontractors promptly or who is having a bad job makes for great dinner conversation. Make sure your project managers keep their ears open at job meetings and instruct them to relay any concerns gleaned from other subcontractors. Also, as a preventive measure, I always make it a point to read our local business newspaper to look for mechanics’ liens being filed in the counties in which we work. If a lien is being filed on one of your customer’s projects, spend the time to investigate. Multiple liens can often be the beginning of the end for a general contractor. 

Scrutinize Contracts
Now that you’re keeping yourself up to date on what’s going on in your market, it’s time to scrutinize the terms of the contracts you are signing. You want to be sure you don’t sign away your right to pursue and collect the money that you are going to invest in a project. By now, we’ve all dealt with the monster named “pay if paid.” This contract clause means exactly what it says. The general contractor is not responsible for payment to you unless they have previously received their funds. Although your attorney will tell you not to agree to a “pay if paid” clause, this provision is extremely difficult to remove from a subcontract and, unfortunately, it’s here to stay. 
We have found that many general contractors are willing to accept “pay when paid” language in lieu of the “pay if paid.” The advantage of “pay when paid” is that it does not totally relinquish the general contractor’s responsibility to pay you if the owner does not pay him. One of my deal breakers is a “pay if paid” clause with a “no lien provision.” This nasty combination, which is becoming very popular, essentially says that the general contractor is not responsible if the owner doesn’t pay and that you are not permitted to lien the project. 

After digesting this scenario, you realize quickly that the credit of the building owner is every bit as important as the general contractor’s. Pulling a credit report on the owner and your customer before signing your contract is a worthwhile and necessary investment. Another good habit to get into is having your sales staff execute a job information sheet when an order is received. You should know exactly who the owner is and by whom he is represented, where he is located, the name of the institution providing financing and if the project is bonded. This information is invaluable if a problem should arise and will allow you to hit quickly and get the attention of the main 

Securing Lien Rights
Now that you have negotiated contract terms that you can live with and the owner and general contractor have met your underwriting criteria, it’s time to secure your lien rights. This is a process you must familiarize yourself with and implement protocols within your company to ensure that your lien rights are protected on all projects. A lien on a project doesn’t guarantee payment, but without one, you are an unsecured creditor. And, as we all know, secured creditors get paid first. 

Lien laws vary from state to state and are often complicated, so consult your attorney or talk to your local construction associations. There are many different companies, including law firms, that provide the service of securing lien rights. Whether you do it internally or externally, it is imperative that you protect your investment.

Finally, you’re probably wondering what makes me such an authority on collecting money. I confess that I am no authority. However, I do have some experience in the art of encouraging deadbeats to get their checkbooks out (as in certified checkbooks). My claim to fame with my peers is a little trip I took last year to North Hollywood, Calif., to collect a $40,000 bill. I figured since I could yell and cuss as well as Tony Soprano and the general contractor was close to going out of business, the chance of getting paid was worth three days of my time. My bet paid off and I flew back to Columbus with our $40,000. Feeling unbelievably lucky, I resisted the urge to catch a plane to Las Vegas and put it all down on one spin of the roulette wheel. The lesson learned is that there is absolutely no substitute for a face-to-face meeting and when the going gets tough, don’t be afraid to take a field trip. 

Oh, by the way, I forgot one little detail. Our company had not performed a credit check on this general contractor and we forgot to retain our lien rights. Had we done our due diligence with the credit process we would have not opened an account for the general contractor. Our new credit policy was written on my flight back from Los Angeles and, as they say, the rest is history. Treat the credit that you extend as if it were a loan, since it actually is. Make sure you know who is borrowing the money and if they are credit-worthy, stake your claim and understand your credit agreement. 


GUM Andrew T. Gum is president of Thomas Glass Co. in Columbus, Ohio. His column appears bimonthly.


© Copyright Key Communications Inc. All rights reserved. No reproduction of any type without expressed written permission.