Michelle Cirson (00:01.112)
Hello, welcome to the Subbies' Toolbox podcast. I'm your host, Michelle Cirson construction adjudicator, lawyer, and the founder of the Subbies Toolbox. Today on my podcast, I want to talk to you about the ways that I've seen builders use payment schedules to cook their books for end of financial year. It's a big
allegation to say that builders are out there cooking their books, but I've worked for builders. used to be a builder CA for more than one builder. And I've seen the way that financial reporting can be used to paint a picture or frame a financial position that might not necessarily be true. And
I think it's best that subcontractors know about these things because when you're dealing with a builder, there's a very good chance you're going to spot patterns. A lot of our clients contact us and some of these toolbox members are reporting to us twice a week on our group Q &A. Some of the crazy things they're seeing builders do and they'll come into our Q &A and they'll be like, Hey,
This builder's not even acknowledging this variation that I've put on my payment claim. He's literally just ghosting me on it. Won't acknowledge it, won't speak to me about it. And when they give me a payment schedule, it's just not even recorded on there. They're completely running silent on these variations. They've never done it before. Why would they suddenly be doing this now? I'm trying to work out what's going on. So this is a pattern that I've seen happen and play out over the years. And in
April, May, June of most calendar years, we start to see the end of financial year book cooking tactics from builders and your payment schedule is going to be a window into what is going on in the back house of the builder.
Michelle Cirson (01:46.09)
So actually checking your payment schedule thoroughly every month when it comes in, actually looking to see line by line what the builder's position is on the items that you're claiming. Because a lot of subcontractors will just look at whether the payment schedule says that they're paying you the exact amount that you've claimed. And that can be a real dangerous problem. So before I get into the ways that builders cook their books at end of financial year by using payment schedules to value down.
amounts that they owe people. I'm just going to take you back down on a little memory lane narrative for a second because when I was a builder CA
I had a particular builder that I was helping to close out all of their subcontractor payments on a bunch of old jobs that were coming up to the end of the end of defects liability period. Now the subbies were all claiming their final retentions and I had all of these invoices for final retentions and I was like, but they've already been paid. We've already paid this retention out. And hand on heart, we were looking at this fresh. I wasn't involved in these projects during the construction phase. I'd come in to help the building company.
at that point in time because they had issues with old CAs and projects with subcontractors that were claiming amounts that they didn't understand. And when I went through the payment schedules for the last payment claims in the lead up to practical completion, I could see that the Builders CA had...
paid out contract sum instead of approving variations. So they would pay out additional contract sum instead of approving variations or pay on account contract sum instead of approving variations. But this is the one that was really sinister that I was surprised to see at the end of the DLP was that the builder CA was actually releasing retention for the exact amount of variations that had been claimed by the subcontractor and not saying a single thing to the subcontractor about
Michelle Cirson (03:45.12)
So what ended up happening was those CAs were no longer with the builder they knew that they were on the horizon looking for a job somewhere else and When the subcontractors came back a year later to claim their final retention It had already been paid by the builder because the retention had been released But the whole time the subcontractor thought that they had just got their practical completion retention and their variations paid So staff of building companies can do dodgy things to hide issues
that they have internally. and I know from experience that in that situation, those CAs just didn't anticipate those variations were coming up. They related to scope of work items that they'd missed in the scope of works. They had to pay the subcontractors variations to get them done. And rather than fess up to their construction manager or the project manager, those CAs just released a portion of retention to match the amount the subcontractor was claiming as a variation. It's quite a clever strategy.
because when you do cost reports in the finance system, releasing retention,
doesn't increase the contract sum. So it didn't come up as a red flag on any of the cost reports to say, well, now we have to pay the subcontractor more. It just kept the subcontractor happy because they looked at their payment schedule and saw they were receiving in the bank the amount they claimed. They didn't look any closer than that because we're all busy and we've all got things to do. But had they actually meticulously gone through their payment schedule, they would have seen that that CA was releasing a portion of retention. The subcontractor had not requested it.
to be released like that.
Michelle Cirson (05:23.703)
they were releasing the retention instead of paying the variation. So you can see why I'm really pushing here that you should be checking your payment schedules thoroughly. They will give you an insight into what is going on with your builder and they can give you early warning signs. So in terms of early warning signs, the end of financial year payment schedule strategies that I see play out in May and June, the first one is not acknowledging variations. So if the builder CA just completely
ignores your requests for a variation sometimes they will pay on account more of your contract sum so that you don't kick up a stink and often times if they're not recording it anywhere on the paperwork it doesn't exist in the finance system so the CFO for the building company has no idea that you want to be paid this extra money so when I say cooking books it could be completely innocent where the builders CA knows that there is pressure at end of finance
year for cost reports. They really can't increase the value of contract sums for internal variations at that point in time. It would cause chaos. They'd be in a whole lot of trouble with finance. Oftentimes the CFO will be communicating to the project teams and saying hey we need to look for money see what you can do here can you claim a head contract variation.
Is there a way that you can value down payment claims? And those emails are a real thing. I'm not the only ex-builders CA who talks about stories of receiving whole of staff emails from CFOs saying, we need to pick up 20 % of every subby claim this month. Who can you short pay? Who will not notice or kick up a stink or suspend work?
So if they're acknowledging your variations, that is one way that they're effectively stopping the liabilities from increasing to you under that contract in the runway to end of financial year. The other thing is where they are valuing down your progress claims by a particular percent each month. Now this might not just happen at end of financial year. In fact, builders do this in a really
Michelle Cirson (07:31.735)
aggressive way where they will value down a percentage of your work.
just enough that it's not viable for you to go to adjudication and have somebody value that work for a monthly progress claim. So typically the percentages that I see that are the sweet spot for the builders is anywhere between 15 % and sort of 22.5%. Once you kick over the 22, 22.5 % of each progress claim that you're effectively valuing down on the subby claims, you can choke their revenue of the subcontractor so much that they just can't comply.
the work. They don't have the money to actually finish the job and that's the point in time that the subcontractor will start coming to people like me for help to get paid. So the builders know, particularly if they're taking retention at the front end of the project as well, so they're already taking 10 % of each progress claim for retention and then they take another 20 % because they try to argue well you're not actually complete that much of the work so we're going to value down your progress claim.
that is a smoked signal that you don't want to ignore because on one hand, it could be that there is a head contract quantity surveyor who is valuing the head contract aggressively like that. And so the builder's cashflow is much tighter than the builder would have liked it to be. But also it could just be that the builder is trying to create a gap between what they get paid out of the head contract and what they're paying you out so that there's margin in that scenario as well.
Now,
Michelle Cirson (09:07.616)
In terms of trying not to pay money, the other way that I see this play out is where there are back charge try ons. So this is where you might see a back charge where a builder has said, we spent an extra $120,000 on the job paying cleaners to do daily housekeeping on the job because you trades couldn't keep your stuff clean. There were 25 trades on site that this problem applies to. We're going to divide our costs by the 25.
subcontractors. So those types of backcharges where they're not actually directly correlated to what you cost the builder but they allow the builder to have a money grab across multiple subcontractors, those things add up. So those little micro backcharges add up. So
One thing that I remember seeing a while ago, I think it was probably five or six years ago, there was a builder in Queensland who had in their scope of work for every single subcontractor that the subcontractor must provide six skip bins over the course of the project. And if they, the value of each skip that was included in the contract sum was 20.
two and a half thousand dollars for the skip to be there and then taken away and disposed off. So that was the price that the builder put in the scope of work saying you must provide six skip bins to the project to the value of two and a half thousand dollars each and they had that in every single subbie scope of work.
And then lo and behold, we come to the end of the job and the builder was going to the subcontractor saying, well, you never provided your skips. And it said that you had to provide the skip for two and a half thousand dollars. So we're to take that off your contract sum at the end of the job. Now that was a pretty clever stitch up because it's really difficult for us to get you paid for something that you were required to provide in your scope of work that you never did. So in the contract review process now, we very carefully make sure that none of those things crop up. And I'm constantly telling that stuff.
Michelle Cirson (11:06.624)
to our toolbox members and to our clients to make sure that when they're doing their contract reviews they pick up on those things. But that's the type of back charge that you will see crop up on a payment schedule in the end of financial year runway for a builders camp. Because it means that they can say on their bottom line to their accountant or to the CFO, we're not going to have to pay that subcontractor as much as we thought because we've got this genuine claim against them.
Now just to backtrack on whether or not something's a genuine claim, you and I both know that these backcharges, bogus backcharges that the builder's going to be dreaming up to try to value down your payment claims, in the set off clauses of your contract, there's a good chance the set off clause is worded to say that the builder can effectively deduct any claimed amount that the builder says is due or might in the future become due.
That effectively means that the builder can deduct from your payment claims anything they accuse you of.
or any costs they've incurred or might incur in the future as a result of something that you were required to do under the contract or that they might have a genuine claim against you for. So broad set off rights under your contract will create a headache for you with this because you're going to have to convince the builder that it's not worth having the argument with you for this. And the reason I know that these are end of financial year strategies is because I see these things appear on payment schedules towards the very end
April, May and June and then the builder just suddenly rolls over in July and goes it's okay no worries we'll settle with you on that and they'll disappear from your payment schedule so
Michelle Cirson (12:52.991)
It really is a painting a picture for the numbers people in the builders camp about what is actually owed. But those, if the builder CA is dreaming up bogus reasons not to pay you, it shouldn't be too difficult to get them to take those off your payment schedules after that deadline, that financial reporting deadline has passed. Now the really extreme version of this in terms of backcharges on your payment schedules is if a builder does something really aggressive,
We've seen builders suddenly go and cash in bank guarantees that subcontractors have given to them for retentions off the back of a
drummed up claim that they might have a right to that security for something. And usually the big ticket things that a builder will say they've got the right to security for is if they give you a notice to show cause and take the work out of your hands and then engage somebody else at that point to do the rest of your scope. Sometimes they'll run off on cash in bank guarantees at that point in time. But the other thing is if they dream up a giant big liquidated damages claim against you.
Now think about it in a practical sense. If you've got two $250,000 bank guarantees sitting right there, and normally the reason that we use bank guarantees is because we think it takes away the low-hanging fruit factor for the builder. But if I'm a builder coming up to the end of financial year and I'm half a million dollars...
in the red and there's two bank guarantees there. I can have a fight with one subcontractor rather than upset 40 subcontractors by valuing down their progress claims. And if I've got a half-baked reason that I might be able to get away with cashing in those bank guarantees, it can be very tempting. We've seen some builders aggressively do this to just go and cash in those bank guarantees, convert the bank guarantees into cash and then put them in their bank account just before the end of financial year.
Michelle Cirson (14:46.741)
So that is a risk that is a very big risk that comes with giving bank guarantees, particularly big ticket bank guarantees. So the other way that we see that present is where the builder would just delay paying cash retentions until after June 30. So those cash retentions might be due and payable and the builder would just keep them in the bank account until after June 30. So that's where you start to see those silly reasons for not paying out your retentions like we haven't got our retentions
back under the head contract yet or you haven't given me the keys back for a particular site lock or a gate or a fence so if you haven't given me the keys back I'm not giving your attentions back we've seen that one used a fair bit and if there are minor defects or the even if they're not actually proper defects but the builders just
going to throw some mud and say, I'm going to accuse you that this is defective and then it's back on you to be able to demonstrate that it's not. So the builder will see if you can work out how to get paid. And usually they've got six to 12 weeks up their sleeve before you can actually be a big enough pest to make them pay you in the process using security of payments. So can see how that's a financial.
pretty close to a financial quarter in terms of the amount of time that a builder could just keep money in their purse instead of giving it to you. So you might be wondering, how do I stop this from happening? If this is going to happen at the end of financial year every year, how do I stop it from happening? That is a really good question. The answer is you need an accounts receivable escalation procedure that you do exactly the same way every single month. And what that does is
Every month that you use your accounts receivable escalation procedure, you are training the builder that you are not the subcontractor to pick on. So if they want to trade with you and they want to do business with you moving forward and you're worried about the relationship, an accounts receivable escalation procedure can actually make you look less threatening than a subcontractor who just sort of goes a bit kamikaze when they aren't paid and escalates in an aggressive way.
Michelle Cirson (16:59.883)
With the Subbies toolbox, we use what we call a good bloke accounts receivable escalation procedure. And there are person to person, human to human reach outs that we recommend at different points in the process. If you've got payments that are being short paid, back charges, refusal to approve variations and email templates on how to approach that with your builder so that you're not just having this conversation when the due date rocks around. There are
little touch points that we make sure that we have with the builder progressively for every single payment claim that will make the builder go, here's Michelle again. She's just sending my, my reminder text message that the payment schedule is due tomorrow and I haven't sent it to her yet.
It's got a smiley face on it. We're all still friends. We can move forward. So making sure that you do everything exactly the same way every single month makes you predictable and non-threatening. It also trains the builder that you know about security of payment. You're a sophisticated professional subcontracting business and builders can't mess with you because you know how things work. So when I was a builder CA and we would get that email saying we need to find 20 % of progress claims this month.
who can we pull from the pay run, who will not suspend work, apply for adjudication or be a serial pest. And I'm embarrassed to say that there were subcontractors who I knew would not kick up a stink and probably half of them were subcontractors who wouldn't kick up a stink because we had a good relationship. The other half were useless with their paperwork.
And I knew that if they were going to try and have a run at us to get paid, I would at least have six to 12 weeks before that person became enough of a problem. And at that point in time, I could just release the payment. would have met that cashflow milestone by that point in time. So if you think that these thought processes and premeditated strategies are not used within building companies, you're really underestimating builders because they are in business just like you are. So if you're thinking about your own cashflow at
Michelle Cirson (19:08.185)
into financial year and strategizing about how you can make things look better for the bank, for future prospects, just for your own targets and goals, then you need to sort of 10x that expectation with the builder because if the builder's cash flow is under pressure, that...
Builders houses on fire. They're backed into a corner and there's a good chance they're going to be taking more desperate strategies, which could mean things they wouldn't normally like to do in their everyday trading values process. So most, what I'm trying to say is most builders are not bad people.
But when you're in a situation where your house is on fire, you have a decision tree and at the end of the day, they're going to make a decision to not pay bills that are owed so that they can make themselves stay alive for longer. So I'm going to leave that with you. Hopefully that's of assistance.
make sure you check your payment schedules every single month. And if you are having some of these things crop up and you want to talk them through with someone, Subbies Toolbox membership is the way to go. We have a Q &A two days a week, Tuesdays and Fridays between 12 and 1. And our subcontractors jump in there and tell us stories about things like this, ask questions, and we can give them those practical tools to be able to go back and implement that accounts receivable escalation procedure in real time and help
triage what's actually going on so if you're having trouble reading the smoke signals or you feel like thinking about this stuff all the time for you just makes you paranoid then you probably need a community of like-minded subcontractors who going through the same thing and somebody who can advise you on what's actually probably going on.
