Have You Done Your Homework?
Pay-If-Paid vs. Pay-When-Paid
Many GCs try to protect their assets by inserting clauses in
subcontracts and purchase orders to pass the risk of nonpayment from the customer onto the subcontractors and vendors. Most states will enforce a pay-if-paid clause if it is
properly written (according to the courts of that state), as
long as the unpaid party still has lien rights. A GC coming into
a new state must be sure that its language will be enforced,
or it may end up financing a bankrupt owner’s entire project.
Sample Scenario: A contractor uses a standard AIA form
subcontract in Louisiana. Even though the owner declares
bankruptcy and never pays the contractor, the contractor
must pay its subcontractors because the subcontract did
not expressly state that payment from the owner was a
“condition precedent” to the contractor’s obligation to pay
its subcontractors. 19
Choice of Laws & Venue for Disputes
Many large owners and contractors insert language into their
contracts, subcontracts, and purchase orders stating that
the law of their home state will govern all disputes and that
their home city is where disputes will be resolved. This can
burden small subcontractors that can’t afford to invest the
necessary time and money to collect a bill. More states are
passing laws making these clauses unenforceable – although
some states address one issue but not the other. 20
Sample Scenario: A contractor uses its own form subcontract that states that the laws of its home state of Missouri
will control all disputes and all lawsuits will be brought in
Missouri. The job is in Kansas, where neither provision is
enforceable. 21 Some provisions, such as time to make payments and interest on late payments, are now in conflict with
prevailing laws and the contractor is subject to a lawsuit that
could impose attorney’s fees. 22
As all contractors know, there are just as many “intangibles”–
factors that only people who know your specific business and
your employees recognize – that can jeopardize a job. Be diligent when assessing jobsite staff for an out-of-town project.
Reliable Onsite Staff
Out of town projects are not the place to try out new talent.
If a jobsite is 1,000 miles away, company owners won’t be
able to regularly check for such issues as unproductive crews
or insufficient materials and instead must rely on phone calls
and daily reports. Before hiring out-of-state staff, be sure
they are fully qualified for the job.
Sample Scenario: A Texas contractor hires a new PM in
Iowa to run a school project without realizing that the PM did
not have experience with walk-in freezers or gymnasiums.
The owner and architect are not happy with quality of work
and demand that some of it be rebuilt.
Accountability of Key People
Even if the right people are in the right jobs, the project
will only succeed if they are actually onsite when needed.
A project schedule might start out as 8 a.m. to 5 p.m.
Monday through Friday, but can easily slip to “arrive midday
Monday, depart noon Friday,” and can be further reduced
by appointments or obligations. Numerous major problems
that require your lead people to be onsite could occur:
the owner/architect/OSHA shows up unannounced; a pipe
bursts, flooding a finished space; shoring fails; a subcontractor walks off the job; etc.
In addition, it can be difficult for people to live away from their
families for extended periods of time. Do you have a means of
assuring that you will have the coverage you need?
Sample Scenario: An out-of-town steel contractor “
deputizes” a local subcontractor to be its representative at jobsite
meetings, not knowing that the subcontractor would make
binding agreements at the meetings that cost the contractor
a lot of money.
Importance of Prequalification
Looking for subcontractors outside of your state can carry risk
and uncertainty. Due diligence and prequalification measures
are critical to ensure the local subcontractor is the right fit.
Sample Scenario: An out-of-town contractor uses local subcontractors that submitted low bids. The contractor cannot
get the subcontractors back to the jobsite to complete items,
putting the contractor into a liquidated damages situation. The
contractor can’t bring another company in to finish the subcontractor’s work without risking loss of warranty coverage.
Permits & Inspections
The process of obtaining construction permits and inspections can be unpredictable with regard to the response time.
When you negotiate an out-of-town contract, how will you
know if local inspectors are accommodating? The trade-off
in working with your own subcontractors and crews in an
unknown market is that they are not as likely to have the
working relationships that can help expedite these processes