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Paid-when-paid contract - Reasonable Time
10

Paid-when-paid contract - Reasonable Time

Paid-when-paid contract - Reasonable Time

(OP)
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 !

RE: Paid-when-paid contract - Reasonable Time

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

RE: Paid-when-paid contract - Reasonable Time

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".

RE: Paid-when-paid contract - Reasonable Time

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.

RE: Paid-when-paid contract - Reasonable Time

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.

RE: Paid-when-paid contract - Reasonable Time

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.

RE: Paid-when-paid contract - Reasonable Time

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.

RE: Paid-when-paid contract - Reasonable Time

Quote (BrianPeterson)

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!

RE: Paid-when-paid contract - Reasonable Time

4
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: Eng-Tips.com Forum Policies forum1529: Translation Assistance for Engineers Entire Forum list http://www.eng-tips.com/forumlist.cfm

RE: Paid-when-paid contract - Reasonable Time

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

RE: Paid-when-paid contract - Reasonable Time

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?

RE: Paid-when-paid contract - Reasonable Time

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.

RE: Paid-when-paid contract - Reasonable Time

has anyone ever used a mechanics lien?

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

RE: Paid-when-paid contract - Reasonable Time

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.

RE: Paid-when-paid contract - Reasonable Time

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: Eng-Tips.com Forum Policies forum1529: Translation Assistance for Engineers Entire Forum list http://www.eng-tips.com/forumlist.cfm

RE: Paid-when-paid contract - Reasonable Time

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
www.engdess.com

RE: Paid-when-paid contract - Reasonable Time

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.

RE: Paid-when-paid contract - Reasonable Time

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.

RE: Paid-when-paid contract - Reasonable Time

Quote (EngDesServices)

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

The part that is stressful for me is that not NET anything, its just "whenever they get to it". Even if I knew with take-it-to-the-bank certainty it was going to be 100 days, I could at least just finance it and get on with my life, but the relationship stress that comes with "whenever" is actually harmful. The the half assed explanations, the "missing PO number on the invoice", some weird thing with an insurance certificate they only discovered 90 days in, the silence etc etc.

-> that's just griping. The important thing that needs to counterbalance the foot dragging is what are consultants willing to do when a client violates an agreement. Stopping work would seem obvious, but its not for some reason.

RE: Paid-when-paid contract - Reasonable Time

Consultants, in particular, are beholden to their customer base, and any whiff of disgruntled customers will have a deleterious effect on future contracts, so I can certainly see why a more nuanced approach is necessary.

TTFN (ta ta for now)
I can do absolutely anything. I'm an expert! https://www.youtube.com/watch?v=BKorP55Aqvg
FAQ731-376: Eng-Tips.com Forum Policies forum1529: Translation Assistance for Engineers Entire Forum list http://www.eng-tips.com/forumlist.cfm

RE: Paid-when-paid contract - Reasonable Time

Glass99.....yes, I have used our lien law in Florida on two occasions. In both instances it got me paid.

Read your state's lien law carefully. In some states (Florida for one), there is a construction lien law separate from the typical mechanic's lien law. Whether a catch-all mechanic's lien law or a specific construction lien law, there are usually limitations on time to file and on giving a notice to owner at the beginning of a project.

RE: Paid-when-paid contract - Reasonable Time

Quote (Ron)

yes, I have used our lien law in Florida on two occasions. In both instances it got me paid.

very interesting about the lien. I have always been too timid to file a lien, so well done. Just looking online, it seemed that the deadline to file a lien was actually very short, something like 60 days. Is it actually that short, because I usually don't get mad enough to consider a lien until about 120 days. What do you mean give notice to the owner at the beginning? Is that something you have in your standard terms and conditions?

RE: Paid-when-paid contract - Reasonable Time

glass99....A Notice to Owner is something that a contractor is required to give an owner at the start of a project to put them on notice that they will be working on their project and should be paid for their work. This applies to subcontractors as well. For contractors, this is mandatory or they cannot file a lien.

In some states, a design professional is not required to give a Notice to Owner; however, they must still abide by the time constraints for filing a lien. In my state, we have 90 days from the last activity on the project to file a lien. Then we have one year to file a foreclosure on the lien if not paid. If we fail to file a foreclosure on the lien, it goes away after 1 year.

In the first one I filed, it caused the lender to withhold their final draw payment until they paid me....good outcome, easy resolution.

In the second one, filed against an office condominium association, they decided to contest the lien since I filed a foreclosure on 7 buildings with multiple unit owners and would have effectively made me an owner of each property. A slightly nasty legal battle ensued and since our state requires mediation attempts first to settle lawsuits, we went to mediation and decided to settle for about 50 cents on the dollar....better than nothing! The only reason I didn't decide to move forward with the lawsuit and to settle at mediation was that I was extremely busy and it was already taking up a lot of my time to do the legal battle. My practice is primarily forensic work so I'm very familiar with how much time a lawsuit can consume. My attorney even decided that I had such a good case that he would go forward with the lawsuit on a contingency basis, so my out of pocket would have been essentially nothing. If I had the time to deal with it, I would have gone forward, but my investigation, deposition and trial schedule was slammed so I just decided to make it go away and settle.

RE: Paid-when-paid contract - Reasonable Time

Ron: that's all super interesting real world feedback. I have heard about contractors using liens but engineers are a different story. 90 days from the end of the project isn't a huge amount of time, which is definitely something which would limit the usefulness of the process for me. Though being from the end of the project as opposed to when the invoice is issued is an important distinction for a long running project.

Its super gross about the condo association taking your claim to mediation. It seems like its just about raw power at that point, and nothing to do with doing what's right. Did they have any actual basis in truth for not wanting to pay? I have sat on condo boards in my personal life, and I know how stupid the dynamics can be. The whole point is that "we are broke, and its not my fault and if its someone else's fault who's not here that's perfect".

RE: Paid-when-paid contract - Reasonable Time

(OP)
This is a great discussion. Thank your for your responses.

RE: Paid-when-paid contract - Reasonable Time

Glass99...the condo association blamed me for helping them select the contractor that ultimately had to be terminated. We had three contractors bid the project. The selected contractor was the low bidder and gave a construction schedule that the owners liked, but we questioned from the beginning. We had the contractor on a previous project and they did a good job...on time and within budget. We were promised the same project manager for the problem job; however, he decided to leave the company just before they were to be on site and after the contract had been signed.

They started showing their incompetent project management within a few weeks of starting. I went to the jobsite a couple of days after they started and found the contractor using day labor to perform skill-required functions and they were doing so without any personal protective equipment and on scaffolding that was not tied off. I started documenting, informing the contractor and informing the owner of the concerns.

This went on for several months of trying to get the contractor to perform according to their contract. They replaced the superintendent once, but kept the same PM. Continued to have issues. Finally about 8 months after they started the owners kicked them off the job. We had recommended it long before, but they delayed. They kept delaying our payment for about 60 percent of our work. Finally we told them we were stopping work on the project and filing a lien. Filed a lien on 6 out the 7 buildings on the project. Still no pay. One year after filing the lien we filed suit to foreclose the lien. That's when they countersued claiming that we delayed the project.....well we did delay the project because we rejected the work of the contractor on numerous occasions and they had to re-do the work.

In Florida, mediation is required first before a lawsuit goes to trial. Only if mediation fails does a trial occur. I settled for about 50 cents on the dollar because I didn't have the time to deal with the suit.

RE: Paid-when-paid contract - Reasonable Time

2
Slightly different situation, but if you are having difficulty collecting on a judgement you have been awarded by the courts, have the local sheriff "seize" all the office furniture of your dead beat client. Based on my experience , he doesnt physically take possession of the furniture , rather he staples a notice to the office stating stating that the following goods have been seized and any attempt to remove theses goods , or this notice is contempt of court.

Most organizations dislike having this notice affixed to the front door , and suddenly develop the ability and willingness to pay their debts.

RE: Paid-when-paid contract - Reasonable Time

Ron - appreciate the back story and the resolution. Really useful to hear about liens being used in real life.

RE: Paid-when-paid contract - Reasonable Time

Paid-when-paid is for suckers. It's easy to get suckered when you're young and/or hungry. I did, but on a small enough scale to walk away from. (Kickstarter-type projects.) Good customers have good credit lines.

A good rule of thumb is "Don't make their money problems your money problems". Cash flow? Tax issues? Kids' Christmas presents? Don't care. Pay me.

RE: Paid-when-paid contract - Reasonable Time

The paid when paid is similar to something I observed when I was about 20 years old and in residential construction. Brand new high end subdivision. Developer told new and aspiring brick mason he was not sure how good he was. Give the developer a good price on the chimney and the brick porch slab and he will consider him on all future houses. The mason did a bang-up job and at almost free price, and it turned into "Give me the same deal on all houses and I will hire you.

End story, dishonest people ALWAYS cheat honest people, honest people NEVER cheat dishonest people.

RE: Paid-when-paid contract - Reasonable Time

Quote (TheTick)

Paid-when-paid is for suckers. It's easy to get suckered when you're young and/or hungry. I did, but on a small enough scale to walk away from. (Kickstarter-type projects.) Good customers have good credit lines.

A good rule of thumb is "Don't make their money problems your money problems". Cash flow? Tax issues? Kids' Christmas presents? Don't care. Pay me.

Quote (Ron247)

The paid when paid is similar to something I observed when I was about 20 years old and in residential construction. Brand new high end subdivision. Developer told new and aspiring brick mason he was not sure how good he was. Give the developer a good price on the chimney and the brick porch slab and he will consider him on all future houses. The mason did a bang-up job and at almost free price, and it turned into "Give me the same deal on all houses and I will hire you.

End story, dishonest people ALWAYS cheat honest people, honest people NEVER cheat dishonest people.

These are nice anecdotes, but the reality is that "pay when paid" and even "pay if paid" are the industry norm between architects and their subconsultant engineers for many projects and firms of all sizes. Most subconsultant engineers I know just accept the terms and hope for the best and usually get paid in 60-90 days but often have to wait much longer. I personally despise the practice and am hoping to begin to have success in negotiating alternative terms and enforcing them. Suspending services/stopping work is a powerful leveraging tool but may not be good for business long term. I am currently in the middle of just such an experiment on a project that is in construction and for which I am providing construction phase services. Still no check in the mail, but on the plus side, my holidays have been much more relaxing and enjoyable without the work :) We'll see what happens.

RE: Paid-when-paid contract - Reasonable Time

In New York, our public clients require we pay our subs within 7 to 10 days; depending on the client. My employer never does that; subs can wait for months. The longer they hold the money the better they look, cash flow wise, to their Wall Street pimps.

RE: Paid-when-paid contract - Reasonable Time

bridgebuster, what you are describing is not the problem of "pay when paid", but of course it compounds the problem for the subconsultants. For a prime to hold money due to subs even after it has been received from the owner is really poor form. Those are the clients that subs should really kick to the curb immediately. But, of course the sub usually isn't aware that this practice is going on because the prime probably just lies and says they have not received the money yet, using the pay when paid provision as a smoke screen.

RE: Paid-when-paid contract - Reasonable Time

gte447f - I agree it's poor form to delay payments. The OP implied he works as a subconsultant and wanted to know what's a reasonable time frame for payment. I think a lot of our subs know we don't pay promptly. We're a big company and they want to work for us.

RE: Paid-when-paid contract - Reasonable Time

Quote (bridgebuster)

In New York, our public clients require we pay our subs within 7 to 10 days

It's interesting 7-10 days is requirement, I didn't know. The NYC DDC took 1921 days (~5 years) to pay my last invoice. The DDC still insists it pays within 30 days, but it gets around that by not starting the processing time until "all conditions have been met", which can include them having the money, and can be years.

RE: Paid-when-paid contract - Reasonable Time

I’m sure that 7-10 days that bridgebuster refers to is 7-10 days for prime to pay sub after prime recieves money from owner.

In GA there is a prompt pay act that requires payment to prime within 15 days and payment to subs within 7 or 10 days from the time that prime receives money from owner. In general construction primes hold owners to this and construction subs hold construction primes to this. Unfortunately design consultant primes do not hold owners to this and design consultant subs do not hold design consultant primes to this.

The above prompt pay act timeframes can be altered by contract and many contracts between design consultant primes (architects) and owners are 30 days, but the owners don’t adhere to this and the architects don’t enforce it. Many contracts between design consultant primes (architects) and subs (engineers) are pay when paid or pay if paid.

RE: Paid-when-paid contract - Reasonable Time

glass99 - I had a DDC invoice rejected (one of many)because our time cards are printed last name, first name but the payroll abstract was submitted first name, last name. Their explanation: "How do we know it's really the same person?" Of course, this was after we had submitted numerous invoices that way.

One of many DDC horror stories; I'm sure you have many as well.

RE: Paid-when-paid contract - Reasonable Time

I can see I was out of my element here. It's a civil matter (but still seems criminal to me).

RE: Paid-when-paid contract - Reasonable Time

Quote (bridgebuster)

I had a DDC invoice rejected (one of many)because our time cards are printed last name, first name but the payroll abstract was submitted first name, last name. Their explanation: "How do we know it's really the same person?" Of course, this was after we had submitted numerous invoices that way.

Classic DDC. And how many days after receiving this indecipherable mess of an invoice did they realize they couldn't pay?

RE: Paid-when-paid contract - Reasonable Time

also re: pay when paid: it's not an entirely unreasonable thing in the context of a poorly funded prime consultant (i.e. a typical architect) paying a subconsultant, but there are two logical points that get missed often:
1. There is increased risk of the sub not getting paid, and they should charge extra for this risk
2. The prime needs to chase the money owed to the sub, even when they have tension in areas not related to the sub. This can especially difficult with additional services.


RE: Paid-when-paid contract - Reasonable Time

Quote (glass99)

2. The prime needs to chase the money owed to the sub, even when they have tension in areas not related to the sub. This can especially difficult with additional services.

glass99, Your point above is a major problem with pay when paid in my opinion. Subconsultants have to trust and rely on the prime consultant to chase the money, or basically act in the sub's best interest as the sub's agent. The problem is, their priorities and interests may not be aligned with yours. This is why I think it is fair and important to negotiate a suspension of services clause that allows the sub to stop work after a certain amount of time even if the contract is pay when paid. This allows the sub to agree to share the risk of non-payment with the prime by agreeing to pay when paid, but also maintains the sub's right to manage its own risk by essentially capping the amount of work you are willing to risk for non-payment. This provides leverage on projects that last for several months, but not for projects with a quick turnaround.

RE: Paid-when-paid contract - Reasonable Time

@gte447f: people writing agreements sometimes live this fantasy world where the sub's money is just a strict pass through with no complicating factors. And it actually is like maybe half the time. I have had some of the most stressful situations of my professional life where an architect won't or can't confront an owner on my behalf when there is an issue. It brings decades long relationships to their knees.

In the case of architects, they want to be in charge of paying me because they want control. But then they don't want to deal with the responsibility.

Yes agreed that stopping work for slow payment is essential. I also push for direct agreements with owners (and am successful in doing so in the last few projects).

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