Contractors performing commercial projects often run into the cash flow dilemma. Projects tend to take a while to complete and general contractors tend to draw out your payments. Because a project may require a large amount of product or you have many projects going at once, your credit with suppliers may get used up. An old tool that helps this is joint checks.
What is a “joint check”?
The construction industry is famous for issuing joint checks and entering joint check agreements, but these agreements can be entered by anyone in any industry. The basic definition of a joint check agreement is, a contractual agreement between multiple parties whereby one party agrees to or is given permission to make payment jointly to two or more parties.
Usually there is a joint check agreement. A joint check agreement is commonly entered between a general contractor, a subcontractor and a material supplier. The supplier, being hired by the subcontractor, wants to protect itself against non-payment. All three parties agree that any payments made by the general contractor for work involving the supplier’s materials will be written jointly to the subcontractor and the material supplier.
The material supplier is protected against the risk of the subcontractor getting payment and not making a proportional payment to it. The general contractor is protected from the same risk, as such an instance would open him and the property owner to mechanics lien or bond claim exposure.
When a general contractor pays a sub-contractor, they list the check to the sub and their supplier. Both must endorse the check for the money to be released. Both the sub and the supplier get paid at the same time. Typically, the sub will take the check to the supplier to get the supplier’s endorsement; at the same time giving the supplier a check for the materials.
There is no such thing as a “standard joint check agreement”.
To the contrary, joint check agreements are a creature of contract. In the United States, all parties have the general freedom to contract for whatever they want. The law only marginally restricts this freedom to prohibit folks from violating public policy (i.e. contracting into slavery, murder…or “no lien clauses”).
Accordingly, the parties to a joint check agreement can write the agreement any way they want. While this sounds nice and flexible, the result is that the industry is flooded with a ton of sample joint check agreements; each of which would sometimes have a significantly different effect.
Why use joint checks?
It simply frees the sub-contractor from full responsibility for the material bill. Because the supplier knows they will be paid when the sub gets paid, suppliers will not consider the amount against the sub’s credit limit. Thus, extending the sub’s amount of open credit.
The danger for the supplier is only that the sub will not perform and be “thrown” off the job. Even then, a case can be made to the general contractor to pay for the job portion that was completed, including the materials.
This is a very useful tool for contractors with no or low credit to grow their business and develop larger credit availability.
Is asking for a joint check embarrassing?
Not at all. It happens all the time in the construction trades. Generals are used to signing such agreements. Remember, joint check agreements help protect generals from downstream payment issues causing liens and such on their jobs.
Over the years contractors have told me they fear asking for a joint check because it signals they are in weak financial condition. On the contrary, it signals excellent fiscal management. Rather than being an embarrassment for a sub, it shows the general contractor you are on the ball.
We love joint check use! Ask us for more information. Our Credit Manager, Lori Critz, has been working with joint checks for years.