Getting paid on a construction project is tricky. It is especially tricky when the construction project runs into financial trouble, construction difficulties, or delay. When problems arise, all sorts of players—the owner, general contractor, numerous subcontractors, lenders and potential sureties—make a grab for project funds. If you are not on top of your game, you might be left out in the proverbial cold. The money grab that ensue can be a “zero sum” game, meaning that another party might get paid at your expense. But, don’t despair: If you follow our recommendations, you increase the likelihood of getting paid on a construction project.
The Five Secrets of Getting Paid
1. Have a written contract with favorable terms.
2. Understand the contract chain.
3. Follow the money.
4. Understand your legal rights.
5. Act now to protect your rights.
NO. 1 HAVE A WRITTEN CONTRACT WITH FAVORABLE TERMS
What are the contract’s key terms? Not only is it important to have a written contract, it is equally important to fully understand the terms of the contract. Parties to a construction contract often attempt to pass on risk to other parties by including unfavorable terms. For example, a general contractor may attempt to pass on unfavorable terms regarding indemnity, warranty and payment risk to subcontractors or suppliers. It is important to set up a process through which your company reviews construction contracts. When you can, negotiate away unfavorable terms or preserve your arguments with the battle of the forms at the front of a project. In the case of a construction contract, what you don’t know can hurt you—especially regarding payment and performance risks.
NO. 2 UNDERSTAND THE CONTRACT CHAIN
Know your neighbors. In today’s competitive construction market it is essential to understand who the players are and where your company fits in with regard to a construction project. Despite your best efforts, it is common for the actions of another party on the construction project to have an impact on your participation at the project. Make sure you know the other participants, understand their track records and plan accordingly. As a supplier, is it worth the risk to supply products using a shoddy install subcontractor? Probably not.
NO. 3 FOLLOW THE MONEY
Construction projects are like a house of cards …at least when it comes to financial trouble. When one contractor has money trouble, it is easy for the problems to spread to other parties on the project. This is why it is critical to understand the flow of money through the project and put in place risk management protocols. Your goal is to ensure that money that is earmarked for payment of your material/services makes its way down the contract chain to your account. Act early—it is best to trap money before it is distributed, rather than trying to force someone to pay twice. If putting your account receivables at risk is not bad enough, another party’s financial troubles on a project often results in unwarranted back charges and warranty claims.
NO. 4 UNDERSTAND YOUR LEGAL RIGHTS
Have a plan. Construction and contract laws vary by state. For instance, each state has a separate set of laws that govern mechanic’s lien and payment bond rights. Although the laws may vary, the concepts tend to be the same. At a high level, understand the concepts of the risk management laws applicable to your business. Then, at the project level, incorporate the specifics into a risk management strategy for each construction project.
NO. 5 ACT NOW TO PROTECT YOUR RIGHTS
Act on the plan. Make sure you do not let your legal rights lapse due to misunderstanding or inaction. Look to your contract, the laws applicable to your project and other documents of importance, such as a payment bond for the steps to follow to secure/enforce your legal rights. Do not allow your customer or other parties in the contract chain to make promises, which are later unfulfilled, to negatively impact your legal rights. Don’t be backed into a reactive position—instead, install a proactive plan to secure/enforce your legal rights in the event there is an attempt to transfer unfair risk to your company.