Contract Re-negotiations

Robert O'Brien

would it be Illegal for someone to want to renegotiate? Why would someone want to do business with a mega-builder in the first place? Did they think they would actually be allowed to make a profit? Did they actually think they would be paid? And on time? If so,I assume they know better now.

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Keith_8

Contract Re-negotiations

I just read the article about the home builder Lennar. They issued letters to all of their subs requesting that they cut their pricing and invoices by as much as 20%. This is on work already under contract and in some cases already completed.

How is this legal?

Keith

The Wire Nut

They can ask, demand, whatever...

... but it doesn't mean that the sub is obligated to cut their contract pricing. The automotive industry in the US practiced this for years, until they had run so many suppliers out of business and/or into consolidation with others, that the suppliers are now bigger than the car companies. Now it's payback time.

I read recently that Ford had their diesel engines yanked when they tried to play hardball with their supplier. Stopped the assembly line... must have gotten management attention, pronto!

If I were a sub to Lennar, I'd weigh the costs and benefits of cutting the invoice by 20%. For example, if I had the option to walk away with 80% of what is owed that day in cash, I might take that offer. Other creditors might not end up walking away with that much...

If, on the other hand, you believe that Lennar is going to be around for a while, you don't need them to keep the company afloat, and you're OK with some additional working capital, a lawsuit, etc. then your best alternative to a negotiated agreement might be to take them to court if they don't pay in full.

To me, this situation is yet another reminder why working as a small fish to a much bigger company can be so problematic.

Brad White_9

Financial Circumstances

As Robert said, well, they can ask...

My biggest concern is what Constantin said about small players in the big sandbox, how a mega-concern can steamroll the little guy knowing that, contract or not, enforcing the contract can cost much more than the 20% delta.

But that 20% delta represents not just OH&P but sometimes the difference between breaking even and owing for materials.

The contract holder can always say "no". The risk is in losing future work which at the rate of 80% of likly cost, is doing you a favor. The notion of doing this after the fact though, after job completion, sounds like the GC using the subs as a financial backer. If the subs agree that is an instant 20% ROI.

Mechanic's Liens have a certain appeal sometimes. Banks hate them

mtfallsmikey

Lots of subs have been clobbered already

In my area by this practice,won't mention any names, but, as I've seen the same cycle several times in my life, many go into business in the boom times, hoping to score big with a large builder or developer, only to get jammed when the going gets tough. Dad and I gave up all new construction except for one builder back in '82, never looked back. During these same boom times a service contractor can clean up, but when slowdown time comes is suddenly competing with the former builder's subs who lowball every job.

Paul Pollets

Below the costs...

Since most subs in the building trades work with a 5-10% profit margin, or less, that means Lennar is asking the subs to do work without a profit. Or even at a loss.

Those subs won't be in business for long.....

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The Wire Nut

Yup...

It's a re-run of the car biz, with the obvious difference that there are a lot more little contractors to destroy than car part suppliers. A sucker is born every minute, or somethng like that.

Yesterday's WSJ mentioned that Lennar posted a 73% drop in net (on the front page). The Lennar CEO may see this as a great opportunity to try and pull a fast one on the subs... see who blinks first.

I'd take it as a lesson not to do business with Lennar, I guess.

Robert O'Brien

Since

the CEO presided over a disastrous qtr.Is he planning a 20% cut of his $5.71 million annual salary?

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The Wire Nut

Hee hee...

I think I personally experienced a CEO that took much greater care in negotiating his pay package and golden parachute than running the business. Less than two years after taking over the business, the company was bankrupt.

Also consider that most CEO's don't take pay cuts. Those that do, frequently load up with stock options instead. (See Steve Jobs as a famous example)

If the business does better in the future, they get a huge windfall, but at least they share some of the business risk... However, in some cases even the stock option grants seem vastly out of proportion with the benefits to shareholders of a revived company.

Steve_35

This is one of the reasons

I shifted the focus of my company. In 2002 71% of our gross sales was with primarily one GC. In 2006 we did NO work for that GC and only 12% of gross sales with 3 GCs.

Granted our gross sales only rose about 10% in that period, but we replaced a huge portion of our business with more profitable, easier to work with clients. And we're learning what a net profit is.

Bernie Riddle_2

Prepare Your Exit

Do not make a dramatic stand on the 20% if they owe you 90 days of invoicing. Be smart & plan your action on this decision, regardless of which way you go. For example if you decide to bail out, be very visible at the site &/or project meetings while at the same time you pull your key (most expensive) workers off the site & limit material purchases for this job. Be prepared to eat a month or so of invoicing. Immediately start to limit your exposure. Listen to others comments but keep you actions to yourself. It sounds like self preservation time to me. .... Bromley

Steamhead (in transit)

If the contracts had already been signed

stating what the payments would be, and Lennar is expecting not to pay what was agreed to........ sounds like a class-action lawsuit to me.

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