The benefits of purchasing project materials and equipment in advance are well-known, and volatility in materials prices may make them even more attractive. Advance purchasing not only ensures that needed materials and equipment are available for a project, but also protects against escalating prices and possible future shortages. As owners increase their demands for advance purchases, subcontractors should keep their proverbial eye on the “payment ball.” Subcontractors can use the Guideline on Payment for Stored Materials and Equipment to educate their project team partners about best practices in the industry for handling payments for advance purchases and storage. The guideline, jointly developed and published by ASA, the Associated General Contractors of America and the Associated Specialty Contractors, states an important principle:
“The contractor’s and subcontractor’s progress payments for suitably stored material or equipment should not be withheld until the material or equipment is actually installed in the work.”
Don’t be bashful when it comes to payment practices—make a copy of the guideline, highlight this language, and show it to clients! An owner or prime contractor that is resistant may feel justified in delaying payments because it views its risk as equal or similar to the subcontractor’s risk. Subcontractors know too well, however, that advancing credit is riskier. Delaying payments impairs cash flow, increases the risk of nonpayment, and reduces the financial incentive for subcontractors to advance their credit. In the words of the guideline:
“Owners that fail to provide for payment of stored materials and equipment discourage prudent business practices and prompt schedule compliance.”
Use the guideline to point out the assurances that have been secured for materials or equipment purchased in advance, and their storage. The owner or prime contractor shouldn’t have less confidence that the materials or equipment will be available after it pays for them. Materials, equipment and their storage typically are covered by insurance. The guideline notes:
“Safeguards can be taken to assure that the owner’s interests are protected from diversion, destruction, theft, or damage to stored materials or equipment that the contractor or subcontractor is holding for future installation. These safeguards may include, but are not limited to: provision of delivery tickets, packing lists, and/or photographs to substantiate delivery; inspection of stored material by the owner or owner’s representative; provision of proof of insurance coverage for off-site storage material; and inclusion of all of the above with the progress payment request.”
Just as you don’t accept excuses for late payments for the work you complete, don’t accept excuses for delaying payments for your early purchases of materials and equipment!