Publications




Search Construction Advisor Today


  • constructionadvisortoday.com

Bookmark and Share

« Condotte America Selects Prolog to Standardize Construction Management Processes | Main | 3D Engineering Solutions Expands Capabilities Across Multiple 3D Laser Scanning/Data Collection Platforms »

08/13/2010

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a0115704f0347970b0134862526cb970c

Listed below are links to weblogs that reference Subcontractor Assumption of the Risk of Owner Nonpayment:

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

Pay when paid clauses are not enforceable here in NC. I wrote a post about the differeing thoughts in different jurisdictions here: http://constructionlawnc.com/2010/04/29/pay-when-paid-clauses-in-the-nc-construction-contract/

I have fought over this issue for years, as a subcontractor, a general contractor, and now as an attorney for both. The Texas case is a little out of date, as we have a new law addressing this issue now that went into effect in September of 2007. It's poorly written, and will undoubtedly be the source of many cases in the future, but essentially it limits the use of these clauses in numerous instances providing the general contractor with far less protection than they once had, allows subcontractors to procure financial information from owners in advance of contracting, but does little to limit an owner's right to withhold funds, on the logic that is controlled by other statutes. Not to be outdone by the drafters of our lien laws, Texas now has the most complicated contingent payment clause in the country as well. Of the states that have rendered these clauses void or voidable, it has primarily been tied to lien rights only, either only effecting those rights, or been outlawed entirely due to the particulars of those states' lien rights, e.g. CA and NY.

In the realm of fairness it is inherently unfair for a subcontractor to be party to any of these contract provisions when he has no control over them or any interaction or contractual relation with the owner. Its insurance for the GC and high risk for the sub. Do you ever think the GC would submit to priority pay to the sub before he takes his cut.?
Donald H. Godi, FASLA RCA#444
dgodi@dhgainc.com

we are a very small framing (wood only) sub and we are trying to get commercial work. that clause is always in the contract and it is not negotiable. and NO we cannot "charge" for this unknown cost or absorb the loss. the contractor will just award it to the next bidder and be done with us if we try.

As a landscape and irrigation contractor, we are always the last man standing on the job. This risk is not fair to us, because if the owner is going to run out of money it is usually at the end. I have tried to negotiate this clause many times to no avail and because we cannot risk losing work over it. We have been stung one time for 50,000, but we have started our lein process to the owner much earlier and more agressively to avoid this. The private market is much worse when it comes to this, and I wish GC's who negotiate with the owners would understand that they are only as good as their subs and they should protect us not push risk on us.

"But if the owner doesn’t pay and a pay-if-paid clause in the subcontract is enforced, the sub has no contractual entitlement to payment. This in turn defeats any mechanic’s lien or payment bond rights the sub might otherwise have had.".....Is this true?

VA Carpenter is doing the right thing. Keeping a sharp eye on your lien rights is one of the ways you can minimize risk.
As a credit mgr at a supply company in DC, I use a co-purchase agreement as well as joint checks, which can protect us as well as the subs.

I have the same question as shahin - is a lien rendered void if that clause is in a contract? The lien law in Florida attaches itself to the property, not the client/GC.

As a GC I incorporate this paid when paid clause into my contracts with the subcontractors. While I do as thorough a job of scrutinizing the client up front, there are always those slow or no payers. Is it fair for me, the GC, to assume all of the risk of payment? That is why we have lien laws and I always encourage my subs to file their notices and protect their rights for payment. The subs can also bring suit against me, which will carry through against the client for breach of contract. As long as the GC is actively pursuing payment through legal means the only other avenue for the subs is to lien the property that the improvements were made to. Another possible way for subs to protect themselves against this clause may be to purchase a bond covering the loss.

First let me say that I am neither a GC nor an SC. I do manage the puchasing of construction and am a long time observer of the development, design and construction process. The pay if paid clause seems unfair, but you have to look at the whole picture.

I can only speak for Massachusetts with regard to the lien law issue. Here, a pay when paid clause does not in any way constrain lien rights, and that is key to the process.

Competitive pressures force GC's to accept fees that are generally less on a percentage basis than the SC's. How many SC's will work on margins in the 2-5% range? The GC will not get the job unless he's willing to, and if the owner does not pay, the GC can't cover either. SC's think that GC's have much better ability to discover the owner's ability or willingness to pay, but I will say as an owner's representative that GC's have much less ability than SC's think.

Pay-if-paids in an of themselves do not preclude filing a mechanics lien, although there may be other language in the agreement that does so.

With respect to bonding companies however, surities will effectively use the same defense that the General Contractor will use - payment is not owed because payment has not been received.

I have used essentially a pay-if-paid clause for 27 years and have never failed to render final payment to a subcontractor using that as a defense. Sometimes the clause is used to defer payment until the owner pays. The subcontractors are not involved in this risk assumption during bid. They become included when the are presented with a subcontract with those terms. A sub could refuese those terms and possibly the GC would go to someone else, or offer different terms. Some of the comments on this post lack perspective. Construction is totally about risk and assumption of risk. Many of the subs we use could buy my company out many times over. If you don't like the terms don't sign the subcontract. There is risk in both aspects, the bidding and the negotiation of the subcontract terms. Moreover, if shifting of risk is discussed it should include the considerable risk that owners and A/Es try to shift to contractors.

We are a steel fabricator and erector subcontractor in PR. In PR there are no lien laws. Thus far we have been sucessful in avoiding paid-when-paid and paid-if-paid clauses.

If we agree to paid-when-paid clauses, then we would have no cause of action against the GC Owner and/or the Payment Bond until: (1) Owner pays the GC and (2) GC pays us. What if the Owner never pays the GC for any reason? We couldn’t go against the PB because of the paid-when-paid clause. We have had situation in which the CM/GC was not paid by Owner for reasons beyond our control, which delayed our payment for more than 12 months (contracts had the paid-when-paid clause). Paid-when-paid clauses only act as credit shifters. There should always be a reasonable time term (be it 60, 90, 120 or even 365 days) in the contract for the sub to get paid or be able to file a claim in a reasonable time term, should the need arise.

All contracts can be modified to contain some language that is beneficial for both the GC and Sub. After all, contracts are to be negotiated, otherwise they would be unilateral.

It is humorous to me how complicated people can make something so simple as paying for something received. Arguments obfuscate the ethics.

There are a couple of issues here:

1) "Pay IF Paid" vs. "Pay WHEN Paid" are NOT the same thing. "Pay WHEN Paid" allows the GC time to pursue all options in gettin the money from the Owner before having to pay the subs. "Pay IF Paid" means a GC is only obligated to pay, IF he gets paid from the owner. Big difference!

2) There are few, if any, GC's that can absorb the hit of a non-payment from an owner. All contractors, whether prime or sub need to share this risk.

3) Subs should ask themselves...Would you work directly for the owner? If so, there is little difference in what the GC is asking subs to agree to.

We have worked for gcs on 4 projects 1 we got paid in a timely manner the rest we have to fight like hell to get our money.1 is tied up in court with 25 liens on the job and the owner is able to open their business and start making money,there needs to be a law that says you cannot get your co until all subs are paid. Getting retainage is next to impossible as well.a lot of times that is the only profit left if you can get 10% profit these days. We are one of the last subs on the job and the money usually runs out by the time we turn in our aia docs for pymnt. The Gc gets their profit before anything is paid out then what is left they pay the subs. One of the gcs we worked for took out all of the change order money they billed for and the subs lost out. We were told that the phone book is full of subs they didnt care about long term business relationships. I also know a gc that would only hire illegal subs string them along on several jobs and run them off without paying them because they could not afford to hire legal help. The same gc never would do anything in writing knowing they were going to steal services. We found a way to avoid this we quit sub contracting to gcs There needs to be some type of system to check on a gc reputations to avoid the crooks. The lien laws have changed to where you have to file a lien within 30 days or lose your rights. which means i have to file a lien when i submit an invoice.


Wow...........the good, the bad and the very ugly all seem to be wrapped up in the GC ranks.
What a shame it never seems to go beyond the money....ethics be damned.

I am a Sub to a Contractor/Owner that miniupulated the final and is refusing to pay retainage unless I do beyond the contract. I have refused to do extra work do to his poor pay. Now they are threateneing to hire other and back charge me. This is not fair that all contracts are for the contractor and the sub that is doing all the work gets shorted. We are the small business that has gotten no help only the big business gets help.

I must reiterate that it is all about risk shifting. If you can't stand the heat, get out of the kitchen.

If contracting were easy the Girl Scouts would be doing it along with selling those delicious cookies.

No offense intended to the Girl Scouts.

The comments to this entry are closed.