On construction jobs, where company leaders must work externally across multiple stakeholders, great leadership must transcend the “command and control” mindset. This is especially true with construction payment – which is typically a complex, compliance-riddled powder keg in which everyone’s money is on the line.

Ruling jobs with an iron fist (e.g., tight and unwavering control over project funds) usually does not prove to be beneficial.¹ In fact, creating such adversarial environments can actually prompt issues involving liens and lawsuits. Further, expending time and energy to put out these fires can take away from other more important initiatives.

The same idea applies to “managing up” the payment chain. Withholding documents or attempting to assert leverage through liens or adversarial proceedings can create a potentially problematic climate for everyone involved.

This article is the first of a construction payment-focused series and will discuss the advantages of proactively and collaboratively managing payment via specific, proven methods.

Payment Chain Management

Construction is typically fragmented; for all parties involved in a project to receive payment, funds must make their way down a “chain” from one party to the next, starting with the owner or lender. The prime contractor receives payment from the owner or lender, pays its subcontractors and suppliers, and so on down the payment chain. If any link in this chain falters, parties that follow will suffer.²

The general rule is that the further down a party lies on the payment chain, the riskier receiving payment becomes.³ In order to receive payment, everything atop the chain must go according to plan. Power lies at the top of the chain, and how those parties wield their power can strongly impact a project’s success.

Consequently, some may choose to take advantage of their high positions in payment chains. They may use retainage, rely on burdensome or even unfair lien waivers, or demand change orders at any given moment, all via leveraging of project funds.⁴

Fortunately, legislation affords protection for lower-tiered parties in the form of mechanics lien rights, bond claims, and other legal remedies.⁵ Because these parties yield powerful tools, there are inherent risks in using project funds as bargaining chips. After all, cash is tight in our industry, and particularly within the specialty trades.⁶ Withholding payment from a subcontractor can spark a dispute, often only taking one claim for an entire job to postpone.

Thus, the need for payment chain management is essential. A contractor atop the chain must ensure everyone below is receiving and making payments, since any hiccup can bring a job to a halt.⁷ Meanwhile, timing payments to go along with job progression is also crucial.

Creating balance is tricky, to say the least. So, what is payment chain management? It’s setting the tone from day one. It’s doing what your company does best. And, it starts with communication.

Managing for Good Outcomes

Payment chain management means managing for good outcomes. While success may look different for every stakeholder, keeping a project on schedule and payments on time is a good place to start. While this may seem simple, many construction participants play not-to-lose (manage and shift risk) rather than to win (manage for good outcomes).⁸

It may be more helpful to illustrate the opposite of what “managing for good outcomes” entails. Abusing leverage is not managing for good outcomes. Keeping information from lower-tiered parties is not collaborative. Resting on protection-first, “CYA” principles hardly sets up jobs for success. Instead, these actions can create division on jobsites, forcing each link in the payment chain to watch its back and try to get the better of the next link in the chain.⁹ When every stakeholder constantly works to insulate themselves and shift risk, project collaboration (and therefore, project efficiency) goes out the window.¹⁰