How Your Texas Payment Terms Can Make or Break Your Cash Flow

Join Texas attorney Karalynn Cromeens as she discusses what every subcontractor needs to know before signing a contract. Contingency Payment Terms can stall or even stop you from getting paid. Learn how to avoid these expensive mistakes.

Watch this webinar to learn:

• What to do if you’re not paid & how to leverage the Prompt Payment Act
• How to navigate contingency payment clauses
• What every TX subcontractor needs to know before signing a contract

Full Transcript

Seth:
Well, I think we’ll go ahead and get started. I’m really excited today to have another great webinar. My name is Seth bloom. I’m the senior director of attorney services at Levelset. We do a lot of different things working within the expert center and our attorney network. You can check out the expert center and the attorney network on our Levelset website, where you can ask questions, check out webinars, read blogs, all about the construction industry as well as this webinar here and all our other webinars are recorded. So there’ll be on our YouTube channel. And if you go to our YouTube channel, we’d love a like, so that would be great. So today, without further ado, I’m super excited to have Karalynn Cromeens, she’s the managing partner at the chromium’s law firm in Houston, in the greater Houston area. And today she’s going to talk about something that I know a lot of contractors on everyone in the industry has a lot of questions about, and probably it’s not your favorite topics.

Seth:
And that is how your Texas payment terms can make or break cash flow. Karalynn, I’ll send it over to you now. Thank you so much for doing this and we look forward to an interesting and educational webinar.

Karalynn:
Cool. Not a problem. Can you, can you hear me all right.

Seth:
Loud and clear.

Karalynn:
Okay, perfect. So I’ll make sure because I’m seeing some messages that people can’t hear first off, thank you so much for being here. I know that it’s a middle of the day and this is, you know, very exciting topic, but this really feeds in to what my mission is. I’m on a mission generally to help subcontractors, but particularly to make the subcontract fair. The ways that contracts are written are anything but fair. Basically you can do everything you’re supposed to do and still be in default and still lose in a lawsuit or not get paid on time.

Karalynn:
Or there are tons of issues and pitfalls that are in a subcontract. And I think one of the main things that people think is subcontractor snake is that there’s somebody out there regulate these things. There is no one. The only rule about subcontracts is that there are no rules and lawyers have a really bad habit of putting outrageous things in there to see if somebody will catch it, to see if they’ll get signed. And I truly, and honestly believe that’s how the subcontract has made it to this point where it’s literally one of the most greatest documents I’ve ever read. And I’ve read hundreds of subcontracts ranging from not so egregious to some stuff for the personal guarantee, for a subcontract. So…

Seth:
I just want to interrupt you for a second. I think there’s some people out there, some participants that are having trouble hearing. I know we’re fine. So that may be, you may want to restart your zoom. I know zoom is ideal,ubut not you Karalynn, I wouldn’t restart your zone. Most people can hear, but just to make sure, uyour audio volume is on. Uand, and again, if you do have any questions about the materials, please feel free to post the questions. And we’ll try to ask them during that, sorry, Karalynn.

Karalynn:
No, no problem. So anyways, that’s what my true mission is. And a big part of that is educating subcontractors on what to look for in these subcontracts, what the terms mean and how to protect themselves, or give them ideas for negotiation, how to have tactical tools. If you already signed one of these contracts and you’re in the middle of it. Because honestly the best bet is to try to work out whatever situation you can. No one will win in litigation in courtroom. So this is my, you know, my broad reach is what the mission of my firm is to reach subcontractors contractors, and to help them. And specifically my push the last couple of years has been on the subcontract. First off I do use an explicit term in this, in this video or whatever you want, sorry, webcast.

Karalynn:
So if there’s somebody who’s listening who has sensitive ears and just wanted a warning before I actually say it. But that goes into, I think you need to know about my background to know why I care that much. I was born raised in rural Illinois and I come from what I like to call the, get shit done, tribe. Everybody else likes to call us blue collar. We, my dad was a farmer, came from generations of farmers. My mom was a waitress. Her whole family came from subcontractors excavating companies, irrigation companies. And like they were all subcontractors. They’re the ones who were actually out there doing things, getting things done. And then you deserve to be protected for that all my life growing up, I saw what happened either when there was no, there was no work or things that dried up, nobody was building anything.

Karalynn:
Or if something went wrong on a project, or as in the case of my grandfather who didn’t get paid for a golf course, he built, he had to throw his whole company in bankruptcy and how harmful that is not only to, to the business, but to the subcontractor’s family. And most of contractors are small family run businesses. And so those things deserve to be protected. And so I come at construction law and having lived it, having been, been in it and my specific push on education now has come from trying to when a, when a subcontractor came to, we had already signed one of these contracts and ended up in litigation and I fought as hard as I possibly could to win for their side. But no matter what I did, I couldn’t, I couldn’t win because they had signed this contract. So I’ve now realized the best way to approach it is from before you signed the contract, educating what this stuff means, the things that are in there to help you, the things that are in there to hurt you and, and, and knowing, and not being intimidated by this, you know, 30 page contract that comes over and just signing it to have it work.

Karalynn:
So one of the most egregious terms is the payment terms that we’re going to cover today. So the first slide is the overview of payment terms. You can go back Jackie to the very first slide. And this is just what the subcontract says about when to submit his pay app. When does the pay app, who does it need to be submitted to, what needs to be attached to your schedule of values? The technicalities of that before you sign a subcontract, knowing what’s in there knowing what’s required to do I have a special pay app form that they require, are they using some kind of online system where you submit your pay apps that way, knowing that before you sign up and before, and knowing that before you signed a sub contract and what it says specifically, I want to take a second here and say, when we get into the actual nuts and bolts of pay-if and pay-when-paid, what this does.

Karalynn:
The question is who is in the best spot to finance a construction project, right? The owner takes out a loan. The general contractor gets paid from the owner, but only gets paid after who has put out money for their labors, who has put out money for the materials, the subcontractor. So what actually ends up happening is the subcontractor, because everybody works on credit, ends up financing the project and the pay-if-paid and the pay-when-paid is what makes that possible. And no other industry, will you find someone who signs a contract that says, Oh yeah, I’m going to make my payment contingent upon some, some currents that I have no control over. There could be a hundred reasons why the owner doesn’t pay the general contractor that have nothing to do with you, but yet in your contract, you’re going to say that’s all right.

Karalynn:
I’ll just wait until you get paid by the owner. Even though I have no control over that, I’m doing a good job. Submitting your timely pay application is not enough to get paid when you sign a… And so I realized the general contractor doesn’t want to take all the risks because that’s how it used to be. Right? The general contractor used to hire the subcontractors. So the contract that says you do the work, I’ll pay you well, when he didn’t get paid, then the general contractor got in business. I got went out of business or had problems. So he’s trying to spread the risk down. Unfortunately, the subcontractor doesn’t get to make the decision who the owner is. The general contractor made the decision to trust that person with credit. And so shifting that risk to the subcontractor is unfair and unreasonable. And so once we go through this stuff, you’ll see that I’ve given some suggestions that are in the middle, that we can share the risks where doesn’t fall all on the subcontractor. Okay. Let’s go to the next slide that starts contingent payment clause,

Karalynn:
And feel free to ask questions as we go through this. They’ll let me know if you have any questions. Okay. So there’s two different provisions pay-if-paid and pay-when-paid. Now, technically the only difference is when you end up in a courtroom. And so we’re going to kind of go through what these things look like, and then I’m going to give you tactical advice. Alright, can we go to the next slide? Perfect. A pay if paid means the general contractor will pay you if they get paid which courts have in this state have found are unenforceable. So if you see a contract that has a, can you go to the next slide? I think there’s two examples of what a pay when paid looks like. Basically there’s no obligation of the contractor to pay you. Now, the only difference between that and a pay when paid is timing.

Karalynn:
So when you’re actually in it, it makes no difference if pay when paid, if paid or pay when paid. So here’s another clause of a pay if pay that when you go to court would be found unenforceable. And so I’ve seen these kinds of drop out of subcontracts because people realize at the end of the day that they won’t be enforced, but what still will be enforced. And it’s still in subcontracts. Every, almost every subcontract that I’ve I’ve read is a pay one pay, which can go to the next screen. All right. Which makes the payment to the subcontractor contingent upon payment from the owner to the general contractor. So it could be many reasons why the owner doesn’t pay the general contractor, like I said before. So let’s go through some examples of the first thing I like to say is when the, and have it somewhere else in the presentation.

Karalynn:
But when you get a subcontract from the general contractor, it’s their first offer. It’s everything they could possibly want in that subcontract. This is the negotiation. This is where you say, okay, you know, I’m valuable. The work that I do is valuable. You’re hiring me because you know, I’m skilled at what I do, but I’m, I’m, I don’t have to agree to everything in this contract. And so that’s the point of time when you start this is one of the things you need to go through to subcontract and look for, it’ll be in there. It might not be titled to pay-when-paid, but there’ll be under payment terms. And it’ll read something on this particular paragraph, which says the general contractor has no obligation to pay the subcontractor till he gets paid by the owner. And basically the subcontractor takes the risk of the owner’s inability to pay.

Karalynn:
So, yeah. You don’t get paid unless the owner pays in general. In the blue is that same paragraph with some language added to make it not all the risk of nonpayment fall on the subcontractor. What, what the paragraph in the blue says is that I submit my pay application to you. If the owner doesn’t pay you within 30 days of use of me submitting your, my payment application, your general contractor and the reason that the owner isn’t paying you, wasn’t my fault. Like, you know, if I was a painting subcontractor and there was a bunch of painting work that needed to be redone. So they will withheld payment from the general, for that painting work, you can’t then ask for the payment for the, your work that needs to be redone. But if I’m not the reason you’re going to pay me the amount of the payout within, within 40 days.

Karalynn:
So you can negotiate that into your subcontracts. So basically you would just add the language in the section in blue to this, or any pay when paid clause. So that’s the first suggestion of what you can do. The next suggestion. Here’s another example in the white of what a pay-when-paid clause looks like. Like I said, they won’t always be called that, but if you read it, it’ll be clear that the general contractor basically has no obligation to pay you until I get payment from the owner. And so in blue is the same provision. But what I added is the same thing. If it’s been more than 30 days and that you submitted your pay application to the general contractor, and the reason the general contractor is not getting paid is not because of you. The general contractor will pay you up to $2,000 to file a lien or start the lien process which may actually benefit the general contractor if their owner’s unreasonably withholding payment.

Karalynn:
But this way it gives you some leverage that you’re not just waiting in limbo, because it could be, you know, some other sub submitted their, their pay application, the GC, you know, late the GC waited to get everything submitted together at the same time, which made them late. And now payment’s gone from being 30 days to 60 days, which you have absolutely no control over. So this is a suggestion of how to, how to evenly display that, you know, the risk of nonpayment from the owner. I have one more suggestion, which is, here’s another example of what a pay when paid looks like. Okay. And then the suggestion is 30. You still not paid after 30. If the owner hasn’t paid the general after 30 days, the general contractor agrees to pay 50% of that pay application within 10 days that you submitted so that you have some leverage.

Karalynn:
The general contractor has got some skin in the game about getting you paid on time about submitting its paperwork on time. These are not unreasonable provisions. In fact you can go to the next one so that the law in Texas is a a pay if paid is not enforceable. Pay-When-Paid would be enforceable, unless you send a letter saying you don’t want it to be enforceable. So the next slide is the letter, a draft of a letter or the required language, which basically says owner, I mean, general contractor. I’m not the reason you’re not being paid. It’s been 45 days since I submitted my pay app, pay me within 10 days under the law, the pay one pay clause is no longer enforceable and it should work great. Right? And so if you sign a pay-when-paid and you don’t have any of those provisions, you didn’t negotiate into those provisions that I’ve had.

Karalynn:
I’ve already given you to do. And you get stuck in a pay when paid clause and you send this letter. In practice, what has happened? What I’ve seen is I’ll give you the example. I sent one of these to Ana, one of my clients that does glass work. And I got, I got a letter back from the general contractor saying the owner’s potentially going to charge me with delay damages. And you may be responsible for some, for responsible, for some portion thereof, if it gets charged. So you’re part of the reason why we’re not getting paid.

Karalynn:
And the problem, the problem with that is that they can put any reason in there. It doesn’t have to be any justification or any proof. They just have to say so, which is why, even though this exists, it’s still better to negotiate the terms that we had gone over to evenly disperse the risk of nonpayment. Another thing I want to bring up at this point in time when we’re getting a pay when paid clause is who is the pay when paid clause not enforceable against your material, suppliers, material, suppliers, didn’t sign the pay when paid clause. I’m not saying don’t just not pay your material supplier. I’m saying, go to your material supplier, tell them what’s going on and say, Hey, I can’t pay you because I haven’t been paid. And then they can take the process, the correct process to file lien, which would at least at the very least get your material supplier paid so you don’t have to, which is which is your money, right? You’re going to get some of your money to pay directly your material supplier. So you can’t, you guys can work as a team to get some of the, even if the pay when paid is trying to be enforced against you, even if, even if there’s some reason they say they’re withholding it for me, you can still use your material supplier as a tool. Like I said, I would not tell them what you have to go tell them what’s going on. So you guys can work together to make this work, to get around the pay when paid clause, but that’s how you can do it. That’s one another way to get at, without all from under a pay one pay clause, if you have already signed one. Does anybody have any questions on pay when paid clauses?

Seth:
It seems to be a pretty quiet group today, and we have a good amount of participants here. So I just want to say, you know, it’s not often you get to ask questions to a fancy, a Houston attorney like this. So you know, it’d be great if we had some questions you know, so far I’m learning a lot. So just keep it open. You can type in the question. You can save it to the end, if you’re, if you’re still working on it, we’ll certainly allow for some time. But yeah, if there’s any questions, just type them through and I’ll keep interrupting Karalynn.

Karalynn:
Not a problem at all. That’s what I’m here for. Also I had in the email that you got, there is a little handout that kind of has everything that we, that we’re going to go over in this and my contact information.

Karalynn:
If you have, if you have any other questions the next section we’ll get into is the prompt pay act, which gives you leverage on collecting your payments. So under the prompt pay act, the owner has an obligation to pay the general contractor. Once a payment application is submitted. Okay? And so it applies to all projects. And so if you’re not paid by the 36 day, you can send a letter demanding payment. If you’re going to send a letter, I would suggest you send an intent letter. That way, you can just do it all at once that says, I’m going to file a lien if I don’t get paid. And I’m going to either start collecting, you know, making a claim under the prompt payment act, which allows for interest at one and a half percent per month, which is a lot of a substantial amount, considering that the default judgment rate is 5% per year, as opposed to one and a half percent per month is a, is an extraordinary remedy.

Karalynn:
What the prompt payment act does, more importantly though, is that if you send your letter saying, Hey, I’m going to file a lien or I’m going to stop working if I don’t get paid in 10 days, gives you the right to stop payment. You have to give them 10 days notice before your stop payment. And if you are forced to stop payment, you can recover not only your interest of one and a half percent per month from the 36 day after it’s past due until you’re paid, but you can also recover the demobilization and re mobilization cost to do that. And so here’s the timeline of when you should send the letter? I would do this. If you’re going to send the letter, I would just do it with an intent to lien letter because don’t get me wrong, the people saying prompt payment act, the fact that they’re going to have to pay interest.

Karalynn:
They’re not worried about the fact that you might stop working. Now, that’s something they’re going to be worried about, but what even has even more leverage than just the prompt payment is it is the, the threat of finally that is the best leverage that a subcontractor or material supplier has because it takes, and I don’t know if there’s any seminar on this, but it takes your work, your unsecured debt and makes it secured by the property where you worked. So that’s really a heavy remedy. The prompt payment is, is a great remedy, because it will give you the interest. But most importantly, I would use it for the 10 day Notice that if I’m not paid, I’m going to stop working. Of course, in this, if the, if the general contractor says that they have a good faith to speak with the amount you’re requesting is owed you can’t stop working.

Karalynn:
So it has its faults. The one thing I can tell you is just in general, nobody ever plans on a project going to litigation or, or just being messed up. But the better records you can keep throughout the project. And if a dispute arises like daily reports are essential, even if your contract doesn’t require them, highly recommend doing them, because it’s a chain of communication where you can say, this is what happened on the project today. If there’s any concerns you’re raising them in writing to the general contractor hugely helpful down the line, because the first thing that’s going to happen when you send one of these notice and non payments letter, default you didn’t even know existed or come out of the woodwork and being able to have a clear record of, wow, that’s funny. I didn’t have a notice of default until I sent it.

Karalynn:
Your late on payment notice is essential because when somebody sees that, when you put that timeline altogether, when somebody sees that note, there was no problem with your work until you ask for payment, it’s a glaring, obviously mistake. And so having the records that tell that story are, are hugely important. You know, if I was building my perfect case, I would have daily reports for every day. And that where you pointed out any potential issues to the general contractor before it became an issue. I think that’s is that all the slides I have there, Jackie you’ll get paid. The prompt payment applies to public works.

Karalynn:
The timeline’s a little, a little bit different because government obviously needs a longer time to pay than everybody else. So, the pay-when-paid provision, if I had to pick one of the most intervention provisions that you need to get negotiate in your subcontract, that would probably be it just because you have no control over payment, then, you know, I had I had a client that was owed a lot of money on a project and couldn’t keep working because they were, they put out over $250,000, but payment was like 90 days late from the general, but it turns out the general wasn’t getting paid from the owner for whatever reason on time, literally put my client out of business. So knowing these things, knowing how to negotiate them upfront are hugely important. So I’m here. If you guys have any questions or any other thoughts.

Seth:
Yeah. I mean, are there any questions out there that anyone has and I’ll continue to feel them? It’s been a very quiet one. Karalynn, I know you told us a story about how you got into this, but tell us a little bit about the scope of your practice. I know you’re in Houston, but do you service the whole state of Texas? Do you ever go outside of Texas? I think you have a satellite office in San Antonio, is that correct?

New Speaker:
Yeah, I do. And I’m working on opening an office in Austin. We pretty much go all over the state of Texas and, you know, actually now the courts on zoom hearings, most of them. So it’s actually been a lot easier, the ones that are still conducting business, but yeah, we go all over the state of Texas. And really my primary focus in my business is subcontractors.

Karalynn:
And not only from the perspective of the subcontract, but the business as a whole, you know, we’re starting, I’m starting a division that works with OSHA, OSHA claims, and helping you go through that. I have an employment division that can help you design your specifically the employment, the employee handbook for your employees. You know, looking at the subcontract business as a whole, having been in the business long enough to know as an employer and having dealt with subcontractors, what they need help with. Because right, you think about it. A subcontractor went into the business that they’re in because they were good at what they did, right? They’re an excellent plumber. They’re an excellent electrician. But what they end up being is, is owning and running a business, which is so much more than they ever thought that they would need. And the problem is I try to get to them before it sneaks upon to them.

Karalynn:
And it becomes an issue having these things, you know, they’re just running, they’re running, they’re running, they’re trying to run their businesses. They don’t have time to look ahead and that’s what I’m trying to do. So to keep any potential issues out we really pride ourselves on customer service. We have a 24 hour response time, basically we become an on call attorney which my practice was founded on. My husband and I started a material supply company while I was in law school. And so after I got out of law school and started practicing law and started my own business, he still had these, running his business and he had all these questions about what lien waivers to sign, and just, you know, joint check agreements and liens and all this. And so he’d pick up the phone and I would insert a question, right? And so I wanted to provide that same kind of service to our clients. You pick up the phone, you have a question, I’ll have an answer for you. Usually the same day. If you send me a subcontract review, I’ve got flat rate prices. I’m reviewing sub contracts. I can have that back in two days.

Seth:
Let me ask you a question. Kind of, it’s a two part question. I know I don’t want to, we’ve all had a lot of,uwebinars information about COVID, but how have the courts worked, where you practice? You said already some things are done by zoom now, and what’s been the biggest effect you’ve seen with your client base or new clients having trouble navigating COVID and getting paid?

Karalynn:
Well, I don’t think we’ve seen, I don’t think we’ve seen the bulk of it yet. I think what’s coming is that I think there’s a slowdown coming because what happened when COVID hit all the new starts, so we’re supposed to start, have been paused. Some of them pick back up, most of them have not. And so that also means everybody held onto the money that they have. I have not seen a lot of nonpayment issues yet, but I do think that they’re coming, especially as things started to tighten down with projects that started at the beginning of the year are now finishing and there’s no new starts. So cash in the construction industry is gonna be tighter. And right now in the courts, you know, everything is a move slow before, it’s, you know, at a snail’s pace now. And it depends on some judges are still on. It’s still doing it, but the ones that weren’t before are definitely not now. So sometimes…

Seth:
We have a question from Nan. How do you suggest a sub can address clauses without the general contractor thinking that the sub is a pain, then the sub has a target on their back throughout the project. Our competitors are dumb and they do not address clauses. So we who care, are the troublemakers, please advise. So it sounds like they’re doing the right stuff and the GCs kind of, you know, done with them, making them sign all those specifications.

Karalynn:
No, and I understand. And so I like to start this premise off by saying, if it’s going to cost you to have a customer, they’re not worth having, you know, you don’t need to go to work, you know, just keep people busy. You’re in this business to make money just like they are. And so I think some negotiation with the general contractor shows them that you’re informed and that you know what you’re talking about and you don’t have to negotiate. Every probation. Part of my job is to tell you what those provision means and you know what you’re agreeing to, and then you can decide what risks you want to take and what risks you don’t want to take. The guys that don’t read those contracts, it will catch up with them. I promise you maybe not on this one, maybe not on that, on the next one, but their lack of knowledge, will catch up with them.

Karalynn:
Whether it be in a change order that ends up costing them thousands of dollars. And those guys are all probably cheaper than you are anyways. And you know, they’re not as well versed as the experienced companies and the general contractor, especially when you’ve had a relationship, it is worth it to them to have somebody they can rely on that’s going to get the job done. You know, they’ll, they’ll pay more for that. They’ll, they’ll deal with the subcontract for that. And he get with one and you do a good job and you can, they know it takes you get, you get to know what to expect from each other.

Seth:
Okay. And everyone’s good. Everyone’s getting chatty. Now, Craig has another question. Some of our contractors are slipping into contracts that the sub is responsible for any manufacturing delays, primarily due to COVID. We feel, we feel they are doing this so they can back charge of any delays that are out of the sub subs control. I personally have had heated discussions with contractors on how we can control a factory. We have no ownership right in, we continually reject this and the contracts.

Karalynn:
I agree. And that’s what you got to keep doing is looking for those things, because how many people to sign those? How many people are really going to be in? You know, I was negotiating with subcontract for a client, which where we added in a whole paragraph that said, you know, if, if things shut down because it’s COVID or workers become scarce because of COVID, we reserve the right to increase our price.

Karalynn:
I don’t think that’s an unreasonable request. We don’t know what’s going to happen. And why should you be forced to carry the risk of not only yourself and your guys, but a material supplier that you have no control over. And we don’t know, you know, things are slowing down from China. There’s a backlog on appliances because the factories were shut down for such a long time. We don’t know what that looks like. And I think you’re right. And I think you’re right to try to negotiate it at least something less than what they’re asking for, you know? And it may be that they have what it probably is is that if they’re already working, they have damages for delay cloth that doesn’t let them out of that. And so the best thing you can do is be honest with them and say, Hey, here’s what I’m looking at in my lead times could change, but I’m not going to take on your wrist that you agree to.

Karalynn:
I mean, I don’t think that’s an innovative science that’s going to have to pay the price for.

Seth:
Well, I think that wraps things up. And Karalynn. I’ll come back to you if you have any closing statements, but I just wanted to thank everyone out there. Again, my name is Seth bloom. I’m senior director of attorney services at levelset. We’re putting on webinars all over the country, especially in our favorite States like Texas. This will we, you can request and we will get you a copy of the video. In addition to that, it will be on our YouTube, on our YouTube channel for Levelset. And please, if you enjoyed the video, give us a thumbs up, write some comments. And also if you have any questions that additionally you think for Karalynn or any construction questions, you’re more than welcome to contact the Chromeen’s firm directly and their information is readily available. In addition to that, we’d love for you to post your questions. So you can hear from a lot of attorneys on a lot of different issues on our expert center, it’s really simple to post questions. So I wanted to thank the Chromeen’s firm and Karalynn and Jackie and everyone that’s helped put this together. It means a lot to us and I hope everyone has a nice day and stay safe during this interesting time in our history.