by Mark A. Cobb, Cobb Law Group

Increasingly, subcontractors assume greater risks for their construction projects as the liability is pushed down from the owner to the prime contractor and then, in turn, to the subcontractor.

The most prevalent risk to subcontractors is payment, as payment is a significant part of every construction contract. Furthermore, subcontractors often do not know much about the owner or the project financing, and they are usually the last to learn about payment or financing issues as the information makes its way down the construction tiers. Ultimately, the more information a

subcontractor has, the wiser the decision can be made as to whether or not to work on a project, and it may also give the subcontractor leverage in negotiating payment provisions in a contract. Although it may be tempting to accept work on every project a subcontractor is offered, performing due diligence will mitigate a subcontractor’s payment risk and prevent problem-laden projects. The information below is applicable between a subcontractor

and a prime contractor. In addition, however, a subcontractor (or supplier), may also use many of the same concepts to learn about the owner, developer, or design professionals involved in the project.

Reputation is Important:
 The key component in negotiating with the parties above a subcontractor rests in subcontractor’s reputation and reliability. If a subcontractor is known for anxiety-free performance and professionalism, it has the ability to dictate many of the terms of the construction contract. When a prime contractor wants a particular subcontractor, they are usually willing to retract some of the risks in exchange for securing its services. A subcontractor who is able to pick the projects on which they work will have significantly fewer payment issues.

In addition to a subcontractor’s reputation, building relationships between the parties is a cornerstone of a successful construction professional. General contractors and subcontractors who work together on multiple projects are more likely to have problem-free projects. Thus, we recommend that subcontractors work diligently to improve their reputations and to establish long-term relationships with the (quality) contractors with which they regularly work.

Know the Parties Involved on the Project:

Construction projects involve scores of decision makers. These are often the principals of the entities or key employees of an entity. A quick search of the Secretary of State’s business database and/or the company’s website will give a subcontractor a list of decision makers behind the companies involved.  It may be very useful to have an understanding of them to learn their business ethos and their position on pertinent matters. Recommendations we suggest to our clients include the following:

• Internet Search: At first blush, this may seem juvenile to some subcontractors, but a simple Google search may alert them to lawsuits, poor recommendations, or other adverse information about a party; conversely, it may show professional awards, professional affiliations, and civic responsibility which may alleviate some of the concerns regarding a particular person or entity.
• Social Media Search: Many people freely share a large amount of personal information about themselves through social media. Looking at their lifestyles, priorities, religion or political affiliation, may give a subcontractor insight into their lives and potential struggles related to problem-solving. A subcontractor may learn about a decision-maker’s personal issues such as illness or financial problem which could impact the project.
• Litigation Search: If a subcontractor is working for a local prime contractor or project owner, it can search the local court dockets for pending or recent lawsuits in which they are involved. Some jurisdictions offer this online, others require that researchers visit the courthouse. A subcontractor may need to hire an attorney to perform this search for larger entities who work in multiple jurisdictions. Regardless, this can be invaluable information regarding the companies’ desire for litigation. Counsel can be contacted, and it is not unusual to learn about the construction histories from the opposing parties.
• Lien Searches: All liens (whether they have been paid or not) are public records and a subcontractor may search the lien docket. This can be a strong indicator regarding payment issues, and provides the subcontractor with a list of others who had disputes with the contractor. Depending on the accessibility of this information, a subcontractor may need to hire an attorney to perform this inexpensive search on a subcontractor’s behalf.
• Bankruptcy Searches: These searches will indicate whether or not a principal has been engaged in multiple bankruptcies. If this is the case, then a subcontractor may need to obtain certain assurances or guarantees prior to undertaking any work.
• Financing Information: Many financial records are available as public records –including personal and corporate debts, types of collateral, certain types of options or lease agreements, etc.  It may take a professional abstract company or attorney to locate and interpret this information, but for larger projects or new contractors, the information may prove very valuable.

Avoid Financing the Project for the Owner:

With paid-if-paid and paid-when-paid contracts, it seems as though the lower-tier contractors finance the project. Consequently, subcontractors must view their contracts (and those upstream) in the same light in which a surety would.  Subcontractors are essentially relying upon the credit worthiness of those upstream; thus, it is wise to treat each new project as an opportunity to obtain information that can (i) help a subcontractor establish the party’s credit risk, (ii) provide a subcontractor with leverage of negotiating, and (iii) help the subcontractor get paid in the event that payment issues surface in the future.  Subcontractors may want to consider incorporating some of the following suggestions into their due diligence prior to signing any contracts:

Contractors vette their subcontractors; thus, it is only fair that they allow themselves to be vetted. Perhaps it should be called a “Project Assessment Form” rather than a credit application, but ask questions similar those asked by a surety for bonding purposes or those found on a credit application. A subcontractor may want to consider gathering useful information such as the following:

• Get detailed information about the owner/developer/design professional involved and their prior and ongoing projects;
• Ask for physical addresses for the various parties;
• Ask for a copy of drivers’ licenses;
• If possible, ask social security numbers from the principals;
• Have the document witnessed (who can be subpoenaed if necessary);
• Include the subcontractor’s terms and conditions for payment;
• Obtain consents to run background checks;
• Require personal guaranties (more than one may be required);
• Ask for references (and contact the references);
• If a subcontractor is concerned about the prime contractor’s payment history, ask the owner to joint check payment to the parties to make certain that the money flows down to the subcontractor.

Negotiate a Better Contract:

Using its own reputation for reliability or using some of the information discovered about one or more of the project participants, subcontractors should try to negotiate the best contract possible.  The following items should be a starting point for reducing or mitigating payment issues:

• Require Financial Assurances: The AIA contracts between and owner and a prime contractor require that the owner provide (throughout the project) financial assurances; there is no reason why a similar provision should not be included in subcontract.
• Add a provision which allows the subcontractor to stop work or demobilize in the event that payments are not made in accordance with the contract.  The contractor’s response to this provision may give a subcontractor insight into the contractor’s ethos.
• Include a provision which allows the subcontractor to add interest and attorney’s fees to the past due amounts.
• In the event that payment issues erupt, make sure that the jurisdiction and venue provisions are acceptable to the subcontractor; if they are too inconvenient, negotiate a different location where disputes are to be handled.
• Often the amounts disputed are not worth the costs of litigation; make sure that the contract includes a provision that any payment problems (or other issues) are to be handled through mediation; this mechanism for dispute will likely significantly lower a subcontractor’s legal costs and expedite payment from the owner or contractor.
• Negotiate a lower percentage for the amounts retained (8% is better than 10% for example); similarly, negotiate that retainage be released (or reduced) as certain milestones are met.
• In the event of a payment issue cause by the owner, negotiate the ability to contact the owner directly and/or receive payments from the owner.

Enforce Legal Rights for Payment:

Throughout the United States, mechanics and materialmen’s lien statutes grant subcontractors legal rights to access to those on higher tiers.  However, these laws are generally strictly construed which means that subcontractors must meet every deadline and every obligation to enforce their rights. Thus, for every project, it is vital that the subcontractors know the following information and track any deadlines:

• Comply with the Statutory Notice Scheme:  Does the project require any preliminary notice from the subcontractor to the owner or the general contract before or contemporaneously with the commencement of work in order to preserve lien or payment bond rights?
• Lien Waivers: Are lien waivers required with PayApps, and, if they are required, are the lien waivers contingent upon payment (or expire after a certain date)?
• Payment Bonds:  Is the project covered by a payment bond for the subcontractor’s benefit?
• Prompt Payment Act:  Is the project’s jurisdiction covered by a Prompt Payment Act? If so, the subcontractor should be aware of its rights and obligations under the act.
• Contractual Notices: It is imperative to know each construction contract and to timely and correctly send any notices required under law or the contract.  Furthermore, text and email strings are usually not the proper forum for a formal notice. Subcontractors need to put the notices on their letterhead and send them to the contractors.
• Claim Deadlines: Every Subcontractor should know the lien and/or payment bond claim deadlines and correctly and timely file its claim of lien and/or claim against the payment bond.
• Perfection Deadlines: Every Subcontractor should know how liens (or payment bonds) are perfected, the deadlines, and requirements for taking this vital step.
• Retainage:  Subcontractors should not forget about retainage. They should know whether or not it has any rights to make a claim against the retainage which the owner or prime contractor may be holding.

Subcontractors and suppliers who want to avoid payment problems perform due diligence on those in the tiers above them. This is a brief summary of some of the steps that can be taken to prevent payment issues.  No one wants to perform work for free, and following these suggestions and developing others can make a significant difference in a subcontractor’s bottom-line.

A leader in Georgia construction law for over 25 years, the Cobb Law Group brings expertise, experience and knowledge to your team. Focusing on project development, construction contracting, construction litigation, and payment issues including materialmen’s liens and payment bond claims, our firm understands your goals and needs. For more information, email: mark@cobblawgroup.net or visit http://cobblawgroup.net