Friday, July 15, 2011

Improving Subcontractors' Cash Flows - Part III

This is the final part of our three part series on prime contractors behaving badly. You can read Parts I and II here and here.

Slow paying prime contractors (customers) are no small problem for many subcontractors who are dependent upon reimbursements to maintain profitability and in some cases, stay in business. Over-aged receivables means that the company is either incurring interest to finance those receivables or foregoing interest if they happen to have some cash on hand. Either way, profits suffer. We sense the significance of the problem as we're out and about with our clients and, as we reported yesterday, a GAO survey found significant issues as well - subcontractors responding to the GAO survey were experiencing an average of 146 days to get their invoices (e.g. progress payments or cost reimbursement vouchers) paid. In a purely commercial environment, this would be unacceptable - companies would not extend credit to customers with such poor payment history.

So, what is a subcontractor to do? What kind of recourse does a subcontractor have when it is not receiving timely payments from the prime. We have a few suggestions. Some of these are preventative measures and won't do much good once problems arise. If you have other ideas, please feel free to leave a comment.

  1. Find out everything you can about your customer (the prime contractor). There have been cases where the prime is experiencing its own financial and technical capability issues and is using amounts due to subcontractors for other purposes.
  2. Know the payment terms of your subcontract. Don't agree to extraordinary terms like we saw recently - 90 days.
  3. Treat the prime contractor like any other commercial customer. Send out dunning notices at 30, 60, and 90 days overdue. Alternatively, notify them, in writing, when they do not comply with payment terms and conditions.
  4. Charge interest on overdue balances (if not precluded by the terms of the subcontract).
  5. Offer discounts for early payments. We caution everyone on this because discounts may "cost" you more than late payments. A term of "2/10,n30" (two percent discount if paid within 10 days, otherwise balance due in 30 days), works out to 36 percent when annualized.
  6. Solicit assistance from the contracting officer cognizant of the prime contract. See yesterday's posting for details on this strategy. This is especially recommended if there is a pattern of late payments.
  7. If there is a dispute over the payment, agree to accept payment for the items not in dispute. Sometimes there are issues over indirect billing rates or a deliverable not meeting spec. Subcontractors should be able to resubmit an invoice with the disputed items omitted until resolution is reached. Some cash flow is better than no cash flow.

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