General Contractor Definition: What they Do, and How they Get Paid
Last Updated on May 29, 2019 | Reading Time: 5 minutes
The term ‘contractor’ is used in many different industries. You can have “contractors” working for all sorts of companies, from the largest Fortune 500 firms on down to the smallest startup or mom-and-pop. Sometimes the term refers to an individual (the phrase “independent contractor” is commonly used; while other times, a contractor might refer to an entire company that picks up work on a contract basis.
However, in this article, we’re going to provide you with the general contractor definition as it relates to the construction industry.
What is a General Contractor?
Here’s the best general contractor definition for the construction industry:
A general contractor is a party with the responsibility to oversee a construction project and who enters into the prime contract with the property owner.
The general contractor is sometimes known as the direct contractor, and this is very important when it comes to getting paid. We’ll explain why by first explaining what is meant by using the terms “direct” and “prime.” A DIRECT contractor is a party who contracts with and is hired directly by the owner of the property. Another name for this is the PRIME contractor. This is determined by who the agreement is with, and not the nature of the work, the name of the company in question, or any other factor.
To put it another way: if your construction company is working on a project or job, and you were hired directly by the property owner, then that makes you the direct or prime contractor. The general contractor is always going to be a direct contractor. However, not all direct contractors necessarily see themselves as “general” contractors.
To illustrate this point, let’s take roofers as an example. Often when an existing roof needs to be repaired or replaced, a roofing company might be hired directly by the property owner to do the work. In this case, that roofer would be the direct (general) contractor. On the other hand, if the project is commercial, new construction and the roofer is hired by the general contractor that’s overseeing the entire project, then the roofer would probably be a subcontractor in that case.
There are many, many examples of construction companies that serve as the general contractor on some projects and jobs (when they are hired directly by the owner), while they are subcontractors on other jobs (when they are hired by someone other than the owner). When it comes to getting paid, this distinction is very important as we’ll discuss in the next section.
How the GC Definition Affects Getting Paid
Getting paid on a construction project is one of these things where the details really matter, and one of these details that matters a great deal is the role that the party in question has on the project. “General contractor,” “subcontractor,” “material supplier,” and “property owner” are all examples of potential roles on a construction project (though there are many more, of course).
Your Project Role is Determined by who Hired you to Work on the Project
Figuring out your “role” seems like it would be very easy. However, we frequently hear from folks in the industry that they have trouble determining how to classify their role on certain projects. “Am I supposed to be the GC on this job, or am I considered a subcontractor?” Here at levelset, we get questions like this one every single day.
Here are a few of the major project payment issues that are affected by a party’s role on the project, and how these issues relate to general contractors.
Is Preliminary Notice Required from GCs?
General contractors don’t always have a requirement to send a preliminary notice (in order to secure their lien rights) on their projects. In fact, GCs are more likely to be on the receiving end of a preliminary notice, since best practice is to send preliminary notice up the chain to all of the upper tier parties including the GC and the owners.
Can a GC File a Lien or Bond Claim?
On public projects, the general contractor is typically responsible for providing the payment bond for the project. (The same payment bond is available for other project participants to file a bond claim against in the event of a payment issue.) Because the GC is the party that is providing the payment bond on a public project, they’re not able to file a bond claim against the same bond. Think about it — you can’t file a claim against the same bond that you provided! So, general contractors are at a little bit of a disadvantage if there’s a payment issue on a public project.
On private projects, general contractors generally have lien rights, though lien filings are not as common from GCs as from other project participants since the GC will typically have a direct relationship to the project owner, and thus, will be in a better position to work out any payment issues before they escalate.
Exchanging Lien Waivers
GCs Have 3 Big Challenges when it Comes to Payments
GCs really have 3 big challenges when it comes to managing project payments:
1) they have to manage getting paid themselves
2) they have to make sure that all of the parties below them on the PAYMENT CHAIN (see illustration) get paid
3) they have to collect, track, and organize lien waivers from every single project participant
Numbers 2) and 3) go together, and it is quite a challenge for GCs. Typically, general contractors can only “see” the first tier of subcontractors, or the parties whom they contract with directly, and have little fear of risk. The real risk for GCs is the fear of the unknown coming from the parties they can’t see. These unseen parties include sub-subs, suppliers, and others on the project that the GC does not have visibility nor a direct line of communication with. In short, GCs have to worry about the entire payment chain on the project.
Many GCs don’t realize that any one of these parties can be the source of a payment problem, and a payment problem that spirals out of control may result with a mechanics lien filing. Some GCs we have spoken to don’t realize that sub-tier lien waivers — where you do not have direct proof of payment — are really the most important ones to collect when it comes to preventing a lien filing.
Other GCs have told us that collecting waivers from all of their subs, sub-subs, and suppliers is a long, often manual process that can take 2-3 weeks or more on larger projects. When people say that it takes a long time to get paid in the construction business, the huge amount of time it takes to exchange waivers is one of the reasons why!
Payment Help for GCs
There’s not enough space available here for us to talk about all of the payment challenges general contractors face on their projects. That doesn’t mean that we don’t understand the challenges, however. If you’re a GC and you want to see how your payment process could be faster, easier, and stress-free, click the banner below to get in touch with us. Our construction payment experts are available and anxious to see how they can help you.