Set Up Subcontractors & Suppliers to Avoid Payment Delays and Liens
- Cost Construction Accounting
- 3 days ago
- 6 min read
Every payment delay, mechanic's lien, or 1099 reporting error starts with incomplete vendor onboarding. When you skip verification steps or rush subcontractor setup, you're creating profit leaks that cost thousands, sometimes hundreds of thousands per project.
This checklist shows you exactly how to onboard construction vendors correctly. You'll eliminate payment delays, prevent liens, ensure compliance, and stop fraud before it happens.
Here's what proper vendor onboarding protects you from: payment fraud through fake invoices or redirected ACH, mechanic's liens from unpaid lower-tier subs, IRS penalties from incorrect 1099 reporting, insurance gaps that expose you to liability, and cash flow problems from missing documentation.
Why Construction Vendor Onboarding Matters
The cost of poor vendor onboarding is measurable and preventable. Missing W-9s or incorrect banking information delays payments coiby 7-14 days on average. For a $500K subcontractor, that's $10K-$20K in late payment interest you shouldn't be paying.
When subcontractors don't pay their suppliers or lower-tier subs, those parties can file liens against your project even if you paid your sub in full. Without proper lien waiver tracking from day one, you're exposed. Incorrect 1099 setup costs you $280 per form in IRS penalties if you can't correct it within 30 days. For 50 subcontractors, that's $14,000 in avoidable penalties.
Payment fraud in construction happens when AP teams don't verify banking information or accept invoice changes via email. The average ACH fraud loss is $25,000-$50,000 per incident.
The Five-Stage Vendor Onboarding Process
1. Collect Core Vendor Information
Before any vendor starts work, collect these critical documents:
Tax & Legal Information:
W-9 form with exact legal name and Tax ID (EIN or SSN)
Business entity type (LLC, S-Corp, C-Corp, Sole Proprietor)
DBA name if different from legal name
1099 reporting classification (most subcontractors = Box 1 NEC)
Banking & Payment Setup:
ACH authorization form (signed)
Voided check or bank letter showing routing and account number
Remit-to address (may differ from business address)
Preferred payment method and terms (Net 30, Net 45, etc.)
Contact Information:
Primary billing contact with phone and email
Physical business address
Remittance email for payment notifications
Verify the W-9 Tax ID matches IRS records using the TIN Matching program. This prevents 1099 reporting errors and backup withholding issues.
2. Verify Licenses & Insurance
This stage is critical for subcontractors. Suppliers need lighter verification. Start with contractor license verification including state/county contractor license number, license classification that matches work scope (electrical, plumbing, general), license expiration date (set 60-day renewal reminder), and license status that shows Active and in good standing.
Insurance Requirements (Minimum Coverage):
General Liability: $1M per occurrence / $2M aggregate minimum
Workers' Compensation: State statutory limits
Auto Liability: $1M minimum if vehicles used on project
Umbrella/Excess: May be required for large projects
Critical COI (Certificate of Insurance) Requirements:
Your company and project owner listed as Additional Insured
Waiver of Subrogation endorsement included
30-day cancellation notice clause
Coverage dates cover project duration
Certificate holder shows your company name and address correctly
The COI alone doesn't prove coverage. Call the insurance agent or carrier to verify the Additional Insured endorsement exists on the actual policy. This single step prevents millions in liability exposure.
3. Execute Contracts & Collect Lien Waivers
Never let work start before these documents are signed. You need an executed master subcontractor agreement or project-specific subcontract, scope of work clearly defined with specifications, payment terms including retainage and invoice requirements documented, and change order process established.
Set up your lien waiver process by collecting lien waiver templates (conditional and unconditional), requiring conditional lien waiver WITH each pay application, exchanging unconditional lien waiver when payment clears, and tracking lien waivers by project in your document management system.
For compliance, collect prevailing wage rate acknowledgment (if applicable), E-Verify or right-to-work documentation, OSHA safety program documentation, and drug-free workplace policy. Without signed subcontracts and lien waivers, you have limited legal recourse for scope disputes and lien claims.
4. Run Verification & Risk Checks
Documents can be forged. Verification protects you from fraud and performance risk.
Required Verification Steps:
License Verification: Check state licensing board database for active status
Insurance Verification: Call carrier directly to confirm coverage and endorsements
Banking Verification: Require signed ACH form + voided check (never accept changes via email)
TIN Matching: Use IRS TIN Matching program to verify W-9 accuracy
Reference Checks: Call 3 recent GC references (ask about quality, schedule, payment disputes)
Federal Project Requirements:
SAM.gov Check: Verify vendor is not federally excluded or debarred
OFAC Screening: Check sanctions lists (Office of Foreign Assets Control)
High-Risk Vendor Additional Checks:
Financial statements or credit report
Surety letter confirming bonding capacity
Site visit to assess capability and equipment
Review of EMR (Experience Modification Rate) for workers' comp
Payment fraud often starts with email-based banking changes. Never accept ACH updates via email require new signed forms and confirm by phone call.
5. Set Up in AP System & Test
System configuration errors cause payment delays and reporting problems.
AP System Configuration Checklist:
Vendor Master Record: Create unique vendor ID (use naming convention to prevent duplicates)
Tax Setup: Enter Tax ID exactly as shown on W-9, set 1099 box correctly (Box 1 NEC for most subs)
Payment Terms: Configure Net 30, Net 45, or discount terms per contract
Banking Info: Enter routing/account numbers carefully, set payment method (ACH/Check)
GL/Cost Code Mapping: Set default account codes for this vendor type
Approval Workflows: Configure project-based routing and approval limits
Document Attachment:
Attach W-9, COI, subcontract, and lien waiver templates to vendor record
Set COI expiration alerts (60 days and 30 days before expiration)
Testing Before Go-Live:
Process test invoice through full approval workflow
Verify ACH payment would post to correct account
Run 1099 preview report to confirm vendor appears correctly
Check project cost allocation is working
Incorrect 1099 box selection creates year-end penalties. Double-check before activating the vendor.
The Seven Most Costly Vendor Onboarding Mistakes
Even experienced construction companies make these errors:
Letting vendors start work before onboarding completes creates pressure to skip verification steps. Require completed onboarding before the first day on site.
Accepting expired insurance certificates can cost you millions in liability. Check dates carefully and set automatic expiration alerts. One day of lapsed coverage creates massive exposure.
Not verifying Additional Insured endorsements is a critical error. The COI alone proves nothing. Call the carrier to confirm the endorsement exists on the policy.
Creating duplicate vendor records through different spellings or DBAs causes payment and reporting chaos. Use Tax ID as your master identifier and enforce naming conventions.
Setting up the wrong 1099 box is expensive. Most subcontractors are Box 1 (NEC). C-Corps and S-Corps are usually 1099-exempt. Get this wrong and you're filing amended returns.
Accepting banking changes via email is how payment fraud happens. Require new signed ACH forms for any banking update, confirmed by phone call.
Not collecting lien waivers with first payment is nearly impossible to fix later. Establish the lien waiver process during onboarding. Once you've made payments without waivers, leverage disappears.
Ongoing Vendor Management
Onboarding isn't a one-time event. Set automatic COI expiration alerts at 60 and 30 days, track contractor license renewals, and update W-9s when vendors change entity type or address.
Review major subcontractors annually for quality, schedule, safety, and payment accuracy. Track dispute frequency and resolution and document any performance issues for future reference. Track lien waivers in your project management system, require conditional waiver WITH each pay app, and collect unconditional final waivers before project closeout.
Use automated COI monitoring services like Cobalt or Veriforce to eliminate manual insurance tracking. These services pull renewals directly from carriers and alert you to gaps.
Stop the Bleeding: Fix Your Vendor Onboarding Process
If you're experiencing payment delays, compliance issues, or lien exposure, your vendor onboarding process is the place to start. These aren't random problems, they're symptoms of systematic gaps in your AP controls.
Construction Cost Accounting helps GCs and subcontractors build compliant, efficient vendor onboarding processes that eliminate profit leaks. We'll assess your current process, identify gaps, and implement the controls you need.
Our core services include Accounting System Setup where we configure your AP system for construction-specific vendor management, including lien waiver tracking, compliance documentation, and project-based cost allocation. We provide Job Costing Implementation to ensure vendor costs flow correctly to projects so you have accurate, real-time visibility into project profitability. Our Fractional Controller Services give you ongoing AP oversight to maintain vendor compliance, prevent fraud, and handle complex accounting issues without hiring full-time staff.
Ready to eliminate vendor onboarding problems? Contact Construction Cost Accounting to schedule a free 30-minute assessment. We'll review your current process, identify immediate improvements, and show you how to build vendor controls that protect your bottom line.
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