Payment Terms That Keep You From Financing Your Subs

Why this matters

The fastest way for a busy shop to run out of cash is to pay subs faster than customers pay you. Every day between your payout and your collection, you are financing the job out of your own pocket, and the more work you take, the wider that gap grows. The terms you set with your subs, before the first one starts, decide whether that gap is a manageable float or the thing that sinks a profitable year. This is the mirror image of the payment cycle you live through as someone else's sub.

The trap: becoming your subs' bank

If your sub terms pay out faster than your customer terms collect, growth makes the hole deeper, not shallower. Twice the jobs means twice the money going out ahead of money coming in. A shop can be profitable on paper and still miss payroll because it fronted every sub while its own invoices sat in receivables. The goal of good sub terms is to keep money out roughly aligned with money in, so the business is not quietly lending working capital to every sub on the bench.

Pay-when-paid versus pay-if-paid

These two terms sound alike and do very different things. Know which one you are writing.

• Pay-when-paid shifts the timing. You pay the sub a reasonable time after the customer pays you. If the customer is slow, the sub waits with you, but the sub still gets paid. This is common and generally enforceable, and it is the sensible default for aligning your outflow with your inflow.
• Pay-if-paid shifts the risk. You pay the sub only if the customer ever pays you at all, putting the customer's insolvency squarely on the sub. Because it is so one-sided, pay-if-paid is unenforceable or heavily restricted in a number of states, and even where it is allowed it must be written in very explicit language to have any effect. Confirm with an attorney in your state before relying on one, and expect good subs to resist it.

Default to pay-when-paid. Reach for pay-if-paid only knowingly, where it is enforceable and genuinely warranted, and never as a way to quietly dump all risk on a sub who did their job.

Tie sub payment to milestones and collection

Align the two directions of the transaction on purpose.

• Match payment points to your collection points. If you bill and collect in stages, pay the sub in stages that track those collections, so you are not far out of pocket at any moment.
• Use progress payments on long jobs, so the sub is kept whole as work completes rather than paid in one lump you have to finance to the end.
• Consider a modest retainage. Retainage is a small percentage of each payment held back until the job closes out and passes final inspection. It keeps a little skin in the game for the sub and a little cushion for you, and it should be a defined percentage in the agreement, not a surprise.

Deposits and mobilization, done safely

Sometimes a sub genuinely needs money to start, usually to buy materials. Handle it without writing a blank check:

• Tie any upfront payment to a concrete deliverable, a mobilization payment released when they actually show and start, or paid against delivered materials, not an advance on trust.
• Keep upfront money proportional to real early costs, not a large slice of the whole job before anything is done.

Protect the cash without starving the sub

There is a fairness line here, and crossing it costs you. Terms exist to keep you aligned with your collections, not to abuse the people who do your work. Stretch a sub too far and your bench thins out, which costs you far more than the float ever did. Put the terms in the written agreement up front, state them plainly, and stand by them, so a sub knows the deal going in and does not feel squeezed after the fact. Reliable subs will accept fair, clear terms. They will quietly stop calling you back over terms that treat them like a lender.

Lien waivers tie payment to protection

Exchange a lien waiver for each payment, the sub signing away their lien rights for the amount you paid. Broadly, a conditional waiver takes effect only once the payment actually clears, while an unconditional one takes effect on signing, so favor conditional waivers exchanged as each payment clears. This closes the loop: money out is matched by protection in, and a payment cannot circle back as a lien on your customer's property.

The mental model to keep

Cash in before cash out. Structure sub terms so the money leaving your account tracks the money entering it, keep the terms fair enough that good subs stay, and let a lien waiver ride with every payment. Do that and a growing backlog builds you up instead of bleeding you dry.

References

• State statutes governing pay-if-paid enforceability and mechanic's liens (vary by jurisdiction; confirm with an attorney)
• Trade-standard progress-payment, retainage, and lien-waiver practice
• See related: Pay a Sub Before the Customer Pays You (Decision Tree); The Payment Terms That Make or Break Commercial Cash Flow