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A New Age of Pay Abuse of Subcontractors

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Why is it still a radical idea that subcontractors and vendors should be paid promptly for work properly performed? While a lot has changed about this aspect of the construction industry, old forms of payment abuse continue and some new ones are becoming popular. If the industry doesn't reform itself, I promise that subcontractors will push for new laws against these practices.

When my Chicago firm, Bigane Paving, works as a subcontractor, most final payment on public work comes about a year after completion, but it can take as long as five years after completion. We have more than one project subcontract that, while completed in 2007, is still open.

WILSON
One of the traditional forms of payment abuse is in subcontracts' common pay-if-paid clauses. These clauses make subcontractor payment from the general contractor dependent on the GC's payment from the owner, even though the subcontractor generally doesn't have the ability to access credit information on the owner and may even be prohibited from communicating with the owner—which, let's face it, is the GC's customer. I understand that having to pay your subcontractors when you haven't been paid impacts your cash flow. But if you're not getting paid for work that you or your subcontractors have performed, maybe you didn't do a good enough job of checking the credit-worthiness of your customer or you failed to work hard enough on collections.

Why do prime contractors accept these terms? On most construction projects, the owner is the only entity for which you can build that bridge, post office or hospital project you want so desperately to win. So, as the prime contractor, you may sometimes find yourself accepting contract terms you might not want in order to win the contract. However, during your negotiations with the owner, it is easy to accept some of those terms because you will use similar ones with your subcontractors.

In my own negotiations as a subcontractor, I can't tell you how many times I've been told by a prime contractor that it has to pass on the poor contract terms from the owner because everyone does it, and if I don't accept them, he knows someone who will.

I ask that you examine your own company's contract documents and consider whether you should modify some of the provisions so that they are in the best interest of the project, neither taking advantage of a less experienced owner nor leveraging monopolistic power over your subcontractors. An angry customer or a cash-short subcontractor is not going to make your project easier or improve your margins, particularly in the long run.

Dispute ‘Forum Selection’ Clauses

An example of a predatory-by-nature practice is a "forum selection" clause that forces even the most minor disputes to be adjudicated in the prime contractor's home jurisdiction. Twenty-two states prohibit these clauses, and the U.S. Supreme Court will take up the issue in a case next month.

Another example is the increasing practice of GCs and CMs using non-standard surety bonds that include clauses that limit the payment bond to the amount payable by the owner to the general contractor, cover only a portion of the project or have an expiration date prior to the likely end of the project.

We're seeing general contractors require their subs to use non-standard surety bonds that provide that, as soon as the GC declares a default, the surety must pay for a replacement subcontractor or perform the work itself. In that situation, the sub faces indemnity payments to hold the surety harmless from its obligation to complete its work with a different subcontractor, and the sub also faces pressure from the surety to do whatever the GC asks to avoid a declaration of default.

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