ACT! Consultants Newsletter Editor's Blog

 Karen Hyde: editor@actnewsletter.com
Jon Finkelstein, Orion InfoSystems

Work Payment Ponzi Scheme

How to avoid being involved in a WPPS, as a Consultant or Client Company

A Ponzi Scheme can apply to investment money, or to time and labor. New money pays old debts.
In your contacts insist on payment within 30 days of project task completion.

Ponzi Schemers pay original investors dividends with some of the money received from new investors.
Work Ponzi Schemers pays the worker for the first jobs with money he got paid for from later jobs.

This may be Intentional, or Unintentional - out of financial desperation by the General Contractor,
such as a small GS who tells the SubContractor "You will get paid when I get paid" - then does not.

Example: General Contractor (GC) gets the SubContract (SC) to
work on Project #2 while paying SC with funds GC received on Project #1
then extends SC to work on Project #4 while paying with funds from Project #2
then work on Project #6 with funds from Project #3, and Project #12 with funds from #4
If SC quits, paid only for 4 Projects, GC still has funds from 8 Projects, never to pay SC.
The Client Firm pays GC regularly and assumes the SC is paid regularly and works happily.
But the Firm pays for a less and less motivated and productive SubContractor because the
GC takes money from SC up front (Projects 1,3,5) middle (6,8,9,10) and end (Project 12)


Client Firms pays regularly (monthly) in full as agreed, to the General Contractor (GC)
GC pays SC for Jan, Feb Mar, Apr with money he receives from Firm in Feb, April, July, and Nov.
keeping payments for Jan, Mar, May, Jun, Aug, Sep, Oct, and Dec when SC quits, burned out.

Example:

General Contractor is paid by Client every month
then pays SubContractor:

Jan work in Feb
Feb work in April
Mar work in July
Apr work in Nov

A non-transparent arrangement for payments from the Firm to the General Contractor is necessary for this scheme.
Payment Date Transparency (PDT) is the antidote, preventing SubContractors from being victims of the WPPS.
The informed SC would not work without pay more than 30 days, if he knows the GC was already paid by the Firm.
Without open communication the GC can convince the SC that the Client Firm is the slow payer.
SC must never let GC get more than a few weeks behind in payments.

Work Payment Ponzi Schemes are not good for the Client nor the SubContractor

Example from a Fictional Firm

# Step Statement by General Contractor (GC) Outcome for SubContractor (SC)
1 Enticement
Jan
"We have a contract with a big name, wealthy Client Firm.  You will be able to get $100/hour and become on-boarded with your own email address and employee ID.  I'll send you our standard Agreement (just a PDF). Sign it and send it back." SC is eager and enticed by the benefits and status. He celebrates.  He does not remember the PDF was never signed in ink by the GC.
2 Initial work "Here are 4 projects to get started with.

Until you get your login credentials you can use mine."
(Optional: GC may keep SC's account for additional WPPS victim.)

SC forsakes all other clients, works quickly, and completes the 4. 
SC does not know account sharing is prohibited by Firm, assuming GC is authorized to share.
3 Payment 30 Day Delay
Feb
"Since you are new, the Firm has to set you up for accounting and payment paper work, so it may take 30 days for your first pay to arrive (lie).  But stick with me and we will make a lot of money from this contract." SC: ""Ok that is fine. I can wait a bit."
Now the SC is hooked in for 30 days of work and $1000's
The GC was really already paid by The Firm
4 l30 Days
March
"Here is the first pay for the 1st project.  The other 3 payments are coming soon. But I haven't been paid for them yet, due to some accounting problem.   Here are projects 5 and 6." By now the SC is hooked in.  He is working on Project 5 and 6, but not yet paid for Project 2
5 60  Days
April
SC complains: "Why haven't I been paid for Project 2?"
GC says: " Oh, good news!  Payment from the Firm just came in today."
SC: "What about projects 3 - 6?"
GC: "Hey, if this doesn't work for you, I can hire someone else."
SC feels if he complains, and leaves, he will never see payment for projects 2 - 6 and someone else will take his job.
6 90 Days
May
Cycle continues.  GC pays for Project 2, while paid by the Client for 1 - 6, and gives Project 7 and 8 to the SC. SC feels more and more enslaved.  He cannot complain to GC, and hopes for the best
7 120 Days
June
SC: "I am having trouble paying my bills.  I need my money!"
GC: "The Firm has not paid me yet.  But I will pay you out of my personal funds."
(This is to give the appearance of the GC caring for the SC)
All along the GC was getting paid regularly. His "personal funds" and business funds are really one and the same.
8 140 Days
July
SC: "I think you have been paid .  If you don't pay for at least Project 3, I am going to tell the Project Manager at the Firm (PM)"
GC: "How dare you betray me!  If you do that, you will never get paid, for embarrassing me in front of my Client!  The PM does no know when I get paid anyway. And he is prohibited by Firm policy from talking to SCs."
SC is very worried and tries saying he will report the non-payment to the Firm's Project Manager.
9 160 Days

SC: "The GC says he was not paid by Firm, so he can't pay me.  Is that true?
Project Manager: "Sorry SC, I don't have access to that information. You are not supposed to contact me about payments.  Talk only to your GC.  He is the only one I am supposed to talk to.  And the GC says he already paid you."

With lack of Payment Date Transparency (PDT), the GC can claim to SC that he was not paid, claim to PM that he paid SC, and no one can prove him wrong.
10 180 Days SC: " I have to quit and work for another company that pays me!."

GC: "OK, Sorry this did not work out for you.  Well, I'll just have to find another guy.  You'll get paid when I do.  Bye."
GC gets $1000's and never pays the SC.  The PDF "agreement" is not signed ink and not enforceable, so Small Claims Court is not an option..
GC moves on to the next victim.

The Client Firm pays GC regularly and monthly for a less and less motivated SubContractor
GC takes money from SC up front  (Projects 1,3,5) middle (6,8,9,10) and end (Project 12)

How to Prevent a Work Payment Ponzi Scheme

For Employers: Here are 4 suggestions for preventive measures to avoid your Firm's good name from being used in a WPPS:

* Payment Date Transparency - authorize the Project Manager (PM) to receive payment dates to the General Contractor (GC) and to tell the SubContractor (SC) when the GC was paid.  

* Communications Transparency - allow the unpaid SC to notify the PM if the GC has not paid the SC as agreed. If the PM tells the SC "talk to the GC about payments", instead of telling the GC to pay the SC, that only enables the WPPS to continue.  

* Direct Payment Clause - Contracts should allow the Firm to directly pay the SC if the GC fails to pay as agreed, so that worker productivity and motivation can be maintained. The US Govt started doing this, with the new FAR Regulations.

* General Contractor Requirements - For a company to be a GC, and hire SCs, it should provide independently audited financial statements to show that it has the capacity to pay the workers regularly, even in the case of delay of payment from the Firm to the GC.
www.mccarter.com/New-Far-Changes-Incentivize-Prime-Contractors-Not-to-Be-Deadbeats-in-Meeting-Their-Payment-Obligations-to-Their-Small-Business-Subcontractors-01-20-2017/

FAR 19.704 and FAR Clause 52.219-9, governing Small Business Subcontracting Plans, has also been amended to require prime contractors to include in their Small Business Subcontracting Plans [a]ssurances that [the contractor] will pay its small business subcontractors on time and in accordance with the terms and conditions of the underlying contract, and [the obligation to] notify the contracting officer when the prime contractor makes a reduced or untimely payment to a small business subcontractor (see 52.242-5).

https://www.federalregister.gov/documents/2016/07/14/2016-16245/federal-acquisition-regulation-small-business-subcontracting-improvements

For Employees:  Here are some suggestions on preventing your being left with nothing for your work.

* Payment Date Transparency - If you are concerned, insist on having some verification of when the GC pays you, in the contract

* 30 Day Maximum - Don't go longer than 30 days, or an amount you can walk away from, between payments for project tasks.

* Half Up Front - Ask for 1/2 payment up front, or at least something before each phase of the project.

* Patience - Resist the temptation to take on new work until old work is paid for

History of Ponzi Schemes

In 1920, George Ponzi probably did not "plan it all" from the beginning.
He did something, people fell for it, then he continued, step by step, as the plan evolved and revealed itself.

Here is a good description, in Wikipedia:  https://en.wikipedia.org/wiki/Ponzi_scheme

A famous example in recent history is the case of Bernie Madoff.
http://www.businessinsider.com/bernie-madoff-ponzi-scheme-363-billion-dollar-exodus-investment-funds-2017-7

I hope these suggestions help all ACT! Consultants and companies with fair contracting procedures for all.

 Karen Hyde: editor@actnewsletter.com

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