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When the Owner Stops Paying: Prepare in Advance to Deal With Subcontractors

Construction

By Mary Bacon, Construction Executive

When the owner stops paying, general contractors are left in a difficult position. Subcontractors, material suppliers and laborers still look to the general contractor for timely payment even if the general contractor has not received the corresponding payment from the owner.

Consider these tips in orchestrating a project to help prepare the company and deal with subcontractors in the event that an owner stops paying.

PLAN FROM THE BEGINNING

Negotiate and establish a detailed, specific and regular payment schedule. Link payment to project milestones that accurately represent how complete the project is. Establishing a clear payment schedule from the beginning assists a contractor, subcontractors and the owner in planning and manages expectations of payment.

LOOK OUT FOR WARNING SIGNS

It is not unusual for the first few months of a project to proceed according to project and payment schedules and then for payment to proceed off-course. Be aware of warning signs like late payment from the owner. Being consciously aware of warning signs and their implications can assist in weighing options and formulating a plan before the owner’s actual non-payment.

COMMUNICATE WITH THE OWNER ABOUT LATE OR NON-PAYMENT

Submit pay applications timely and regularly be in communication with the owner about payment. What did the owner identify as the source or reason for non-payment? Is it something the contractor can resolve like a quality of work issue or accelerating work to get back on the project schedule? Understanding the owner’s perspective can assist in communicating the perceived issues to subcontractors, analyzing how the issue can be solved and assist in getting the project’s payment schedule back on track.

IDENTIFY AND INVESTIGATE THE PERCEIVED ISSUE

Did the owner identify a contractor (or subcontractor) issue as the alleged reason for non-payment? Does the issue have any merit? Does the contractor have sufficient backup documentation to support its position regarding the perceived issue? Once the issue has been identified and investigated, a contractor will be in a better place to analyze the position the company and its subcontractors are in and weigh options accordingly.

ANALYZE THE OPTIONS

Evaluate exactly why the owner is refusing payment. How much is past due? When is payment expected? Is it a repeat owner that is known to “slow pay” but does eventually pay? Is it a new client that the company does not have any history with? Is the owner refusing payment for the project in its entirety, or a specific change order? How logical or rational is the owner’s reasoning? What are the legal and non-legal routes, their associated costs and benefits, and their likelihood of success? Understanding and analyzing the options can assist in communications with subcontractors.

COMMUNICATE WITH SUBCONTRACTORS

Keep the lines of communication with subcontractors open. Inform them of the late or non-payment that will affect their pay applications. Make them aware of any relevant understandings between the owner and the general contractor to remedy and perceived issues and understanding of when payment will be made. Communicate necessary information regarding how the general contractor intends to proceed and deal with the non-payment.

EVALUATE OPTIONS WITH RESPECT TO THE SUBCONTRACTOR

Was there a problem with a subcontractor’s work that caused the underlying non-payment? Or is the subcontractor’s work already completed and accepted? Does the subcontractor deserve payment? Is the company in a position to pay the subcontractor out-of-pocket? Will the subcontractor agree to accept payment late? After considering available options (and including the subcontractor in considering those options to the extent necessary), advise the subcontractor of the decision so that it can decide how to best proceed.

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