We live in a credit economy; few of us pay COD for anything anymore. This is certainly true in construction. Typically, everyone is paid for their labor or materials a month or more after their performance―owners need time to satisfy themselves (or to have their architects satisfy them) that work being invoiced for has been accomplished satisfactorily, and so they pay general contractors weeks after the end of a requisition period; general contractors pay their subs a week or so after that; subs pay their sub-subs and suppliers after they are paid (hopefully before their supplier’s “net 30” terms kick in). And the lower you are in the food chain, the more risk of something going wrong above you; a weak link in the chain will plunge those below into the abyss when it snaps.
It all starts at the top. Reasons that owners might not pay their GC’s for work performed usually fall into one of four categories: either (a) they don’t have the money, or (b) they think (rightly or wrongly) that some or all of the work being billed for is deficient, or (c) they think (rightly or wrongly) that “extra” work being billed for under a lump-sum or fixed-price contract is within the original agreed scope of work and not a true change, or (d) they think (rightly or wrongly) that the GC isn’t paying its own bills, e.g., insurance has lapsed, subjecting the owner to a risk of liability, or lower tiers aren’t being paid, subjecting the owner to a risk of mechanic’s liens.
What will happen in each of these scenarios is a matter of agreement between the parties. Each party in the process can seek contractual provisions to limit its risks under each of these potential link-busters. For example, GC’s can bargain for suspension and termination provisions in their contracts if payment is not timely received due to (a), or insert “pay when paid” or “pay if paid” clauses in their subcontracts in order to share the risk of (a) with their subs. [I’ll be discussing this tool in a future blog.] Subs can bargain for the right to be paid by the GC for their portion of the work even if there is a dispute under (b) regarding someone else’s scope of work. Owners can bargain for “continue to work during disputes” clauses in their general contracts, foisting more risk onto the GC when payment is stopped due to (c). Owners can bargain for “joint check” or “direct payment” methods of seeing lower tiers paid when (d) is in play. I can think of dozens of other approaches. The key is simply anticipating that what can go wrong will go wrong – and contracting around the problem up front as best you can.
Successful bargaining on these and similar matters is generally a matter of negotiating leverage. A party will have more or less bargaining power depending on how much competition there is for their particular scope. It all comes down to the alternatives available to the bargainers, and how badly they want/need the party with whom they are contracting. Form contracts provided through the AIA and other groups attempt “fair” solutions on many of these issues, and are so popular that they have come to establish informal “default” rules on a number of payment topics. This is often a useful bargaining chip when resisting an onerous payment provision in an owner’s or a GC’s proposed contract form – even one presented on a “take it or leave it” basis.
You don’t need a lawyer to negotiate a contract, and as long as you are savvy enough to anticipate the things that might go wrong and address them in your contract up front, you are probably well-served to try and negotiate your own deal with an AIA form as your template – at least for smaller contracts. The larger the job, the more running a contract by your attorney makes sense. But don’t wait too long; you will lose leverage once you are into the job. If I had a nickel for every client who started work before their contract was signed, I’d retire from the practice of law and just write bogs full time!
It all starts at the top. Reasons that owners might not pay their GC’s for work performed usually fall into one of four categories: either (a) they don’t have the money, or (b) they think (rightly or wrongly) that some or all of the work being billed for is deficient, or (c) they think (rightly or wrongly) that “extra” work being billed for under a lump-sum or fixed-price contract is within the original agreed scope of work and not a true change, or (d) they think (rightly or wrongly) that the GC isn’t paying its own bills, e.g., insurance has lapsed, subjecting the owner to a risk of liability, or lower tiers aren’t being paid, subjecting the owner to a risk of mechanic’s liens.
What will happen in each of these scenarios is a matter of agreement between the parties. Each party in the process can seek contractual provisions to limit its risks under each of these potential link-busters. For example, GC’s can bargain for suspension and termination provisions in their contracts if payment is not timely received due to (a), or insert “pay when paid” or “pay if paid” clauses in their subcontracts in order to share the risk of (a) with their subs. [I’ll be discussing this tool in a future blog.] Subs can bargain for the right to be paid by the GC for their portion of the work even if there is a dispute under (b) regarding someone else’s scope of work. Owners can bargain for “continue to work during disputes” clauses in their general contracts, foisting more risk onto the GC when payment is stopped due to (c). Owners can bargain for “joint check” or “direct payment” methods of seeing lower tiers paid when (d) is in play. I can think of dozens of other approaches. The key is simply anticipating that what can go wrong will go wrong – and contracting around the problem up front as best you can.
Successful bargaining on these and similar matters is generally a matter of negotiating leverage. A party will have more or less bargaining power depending on how much competition there is for their particular scope. It all comes down to the alternatives available to the bargainers, and how badly they want/need the party with whom they are contracting. Form contracts provided through the AIA and other groups attempt “fair” solutions on many of these issues, and are so popular that they have come to establish informal “default” rules on a number of payment topics. This is often a useful bargaining chip when resisting an onerous payment provision in an owner’s or a GC’s proposed contract form – even one presented on a “take it or leave it” basis.
You don’t need a lawyer to negotiate a contract, and as long as you are savvy enough to anticipate the things that might go wrong and address them in your contract up front, you are probably well-served to try and negotiate your own deal with an AIA form as your template – at least for smaller contracts. The larger the job, the more running a contract by your attorney makes sense. But don’t wait too long; you will lose leverage once you are into the job. If I had a nickel for every client who started work before their contract was signed, I’d retire from the practice of law and just write bogs full time!
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