When working as a supplier or subcontractor in construction, you know payment delays are all too common. They can be caused by vague contract language, missed deadlines, or even errors in processing. It’s not always about what you do or don’t do—it’s often hidden in the contract’s fine print.
To safeguard your business and keep cash flow steady, you need to be vigilant about potential issues that can delay payments. The good news is, if you know what to look for, you can address many of these problems before they become obstacles.
In this article, we’ll walk through common payment issues that suppliers and subcontractors frequently encounter. By the end, you’ll have a clear understanding of how to spot red flags, where they tend to appear in contracts, and what actions to take to protect your business from avoidable delays.
Broad Default Clauses for Withholding Payments
Some contracts include clauses that allow payments to be withheld for any “default” by the subcontractor, even for minor or unclear reasons. These clauses can be used to delay payment for issues that may not significantly impact the project.
Where You’ll Find It: These clauses usually appear in the “Breach of Contract” or “Termination” sections. You might see phrases like “any default by the subcontractor may result in the withholding of payment.”
Why It’s Risky: Vague default clauses give clients too much control to delay payment for minor issues or subjective reasons.
How to Address It: Negotiate for specific language that limits withholding payments to significant issues. For example, “Payments may only be withheld for material defaults that significantly impact the project, and the subcontractor must be given written notice and an opportunity to cure the default within 10 days.” This ensures that minor problems don’t become reasons for delayed payments.
Withholding Payments Due to Third-Party Claims
A common issue that subcontractors and suppliers face is having their payments withheld because of disputes or claims made by unrelated third parties. These claims may arise even when the problem does not concern your work.
Where You’ll Find It: These clauses typically appear under sections related to liabilities or claims. You might see phrases like “payment will be withheld if a lien or claim is placed by any third party” or “the contractor is responsible for resolving any third-party disputes.”
Why It’s Risky: If you’re responsible for resolving third-party claims, it could tie up your payment indefinitely. Even if the issue isn’t your fault, the burden is on you to fix it before you can get paid, leading to long delays and cash flow problems.
How to Address It: Make sure the contract clearly states which claims you are liable for. Negotiate to include a clause that specifies you are only responsible for third-party claims directly related to your work. For example, “Subcontractor is only liable for claims resulting from their own actions or omissions and shall not be penalized for unrelated third-party claims.” This wording limits your exposure and keeps your payment from getting caught up in disputes you had no control over.
Unclear Payment Milestones
Many contracts set payment milestones tied to specific stages of work. However, when these milestones are poorly defined, they can be used to delay payments, often with the claim that the work is incomplete.
Where You’ll Find It: Look at the payment schedule section or a separate appendix that outlines project milestones. Phrases like “payment will be made upon completion of milestone work to the satisfaction of the owner” are red flags if they don’t provide more detail.
Why It’s Risky: Without clear definitions of what “completion” means, the client can delay payment by claiming that milestones haven’t been met. The lack of clarity can also lead to disputes over what work was actually done.
How to Address It: During negotiations, ask for specific and measurable milestones. For example, instead of “completion of electrical work,” you might request: “All wiring installed and inspected by a licensed electrician.” This way, you and the client have a clear, shared understanding of when the milestone is achieved—and when payment is due.
Nonperformance Retainage Without Fair Notice
In some contracts, retainage (holding back a portion of the payment) is applied for nonperformance. The problem is that these clauses can be too broad, allowing retainage to be applied without giving you a fair chance to correct any issues.
Where You’ll Find It: Look in the payment terms or sections labeled “Withholding for Nonperformance.” You may see language like, “retainage may be applied at the contractor’s discretion in the event of nonperformance.”
Why It’s Risky These clauses give the contractor or client too much control over when and how to apply retainage, which can lead to unnecessary delays in receiving your payment.
How to Address It: Push for language that requires the client to provide written notice of any performance issues, along with a reasonable timeframe for you to fix the problem before retainage is applied. A clear example would be: “Retainage may only be applied after written notice is given, detailing specific performance issues, and allowing the subcontractor at least 14 days to correct them.” This ensures you have time to resolve the issue and avoid an unfair payment hold. It may also be possible for retainage clauses to be written out of the contract upon clear discussion with your client.
Withholding Payments For “Defective Work”
Contracts that allow for withholding payments due to “defective” or “unsatisfactory” work can quickly become a nightmare. These clauses are often vague, leaving the door open for clients to delay payments with little explanation.
Where You’ll Find It: You’ll usually spot these clauses in contract sections related to payment terms, performance standards, or quality control. They often say, “contractor reserves the right to withhold payment for any defective work” or “payment may be delayed if the work is not completed to the owner’s satisfaction.”
Why It’s Risky: The problem is the lack of specific criteria for what constitutes “defective” or “unsatisfactory” work. The client ends up with a lot of discretion to delay payment without giving you a fair chance to address the issue.
How to Address It: During negotiations, push for specific language. For example, instead of broad terms like “defective work,” ask for something like, “Payment may be withheld only if defects are documented in writing, outlining specific issues and providing a timeframe for correction.” This way, you know exactly what needs fixing and can ensure that payment is only delayed when there’s legitimate cause—and you’ll have the opportunity to resolve the problem.
Withholding Payments Over Insurance Disputes
Sometimes, payments are withheld because of issues with insurance coverage. If your insurance doesn’t meet the client’s requirements or if there’s a delay in updating your insurance documents, the client can put your payment on hold.
Where You’ll Find It: Check the insurance requirements section, which is usually near the end of the contract. You may see language like, “payment may be withheld if the subcontractor’s insurance does not meet all requirements, including any updates requested by the owner.”
Why It’s Risky: Vague insurance requirements can lead to disputes and delays if your coverage is questioned. Even if you’re working to resolve the issue, your payment can be frozen until everything is sorted.
How to Address It: Clarify precisely what insurance documentation is required and ensure the contract gives you a fair process for resolving disputes. For example, you could negotiate a clause that says, “In the event of an insurance-related dispute, the subcontractor shall have 30 days to resolve the issue without delay of payment unless there is a material risk to the project,” giving you time to sort out any issues without your payment being unnecessarily withheld.
Manual or Error-Prone Accounts Payable Processes
Even if the contract is clear and straightforward, payment delays can still happen due to errors or inefficiencies in the client’s A/P system. You’ll notice this most when dealing with clients who still rely on manual processes.
Where You’ll Find It: This issue is less about contract wording and more about how the client handles invoices. You can often uncover these problems during onboarding or project meetings by asking questions about their payment process.
Why It’s Risky: Manual AP processes are prone to errors like missing PO numbers, incorrect amounts, or lost invoices—all of which can delay your payment.
How to Address It: Be proactive by asking if your client uses automated systems for invoicing and payments. If they don’t, take extra steps to confirm that your invoices have been received and processed correctly. Follow up regularly to ensure there are no processing delays.
Take Control of Your Payments
You don’t have to accept payment delays as a part of doing business. You can protect yourself from common payment issues by being proactive during contract negotiations and staying vigilant throughout the project. Take the time to review contract terms carefully, push for clearer language, and set up processes to keep on top of compliance and invoicing.
Remember, your time and work are valuable—don’t let vague language or procedural errors hold up your payments. The more proactive you are now, the fewer headaches you’ll face later when it comes time to get paid. Keep your contracts tight, your documentation thorough, and your communication clear—and you’ll see the difference in how smoothly payments flow.