Volume 36, Issue 10, October 2001
What You Don’t Know Can Hurt You
by Steve Green
Ignorance of the law is no excuse. This is a saying we were told as teenagers after we received our first ticket for a traffic violation. The same is true in business. “Fall behind in the latest news, or neglect to update your legal knowledge and suffer dearly.”
Issues regarding the legal rights of subcontractors have been a virtual hotbed of debate across the industry lately. Contracts, new legislation and late payments are all major concerns. We as suppliers and glazing contractors need to be aware of the legal rights of subcontractors, as well as legislation underway regarding these rights. However, it can be difficult to wade through the complex wording of legal jargon when dealing with contract issues.
The long and short of it is that we all want to get paid, on time and in full. Time and again, I hear tales of contract glaziers and other subcontractors who still await timely payments. Late payments—even on just one project—have the potential to wreak havoc on a company’s entire business.
Taking Care of Business
Legislation on Arizona’s Senate Bill 1549—the first bill of its kind in the United States—set prompt payment requirements on private (as opposed to government) projects. Although the passage of the Construction Industry Payment Protection (CIPP) Act of 1999 (Pub. L. 106-49)—an amendment to the Miller Act (40 U.S.C.A. Section 270a, et seq.) of 1935—set legislation for government-related public projects, hard and fast legislation for private projects had not been covered adequately. As a result, owners paid general contractors in 45- or 60-day payment cycles, and subcontractor payment was delayed as a consequence. The new law requires owners to pay progress payments to general contractors within 21 days of billing. General contractors must then pay subcontractors within seven days. This requirement works well for both parties involved.
What about alternative payment arrangements agreed upon by both owners and general contractors? These changes are allowed, as long as they are documented clearly and conspicuously on every page of the contract. The contractor has no obligation to tell the sub explicitly that the billing cycle is different. Therefore, it is the subcontractor’s responsibility to notice this detail when reviewing the contract before agreeing to work on the project.
Arizona’s Nice to Visit, But ...
Obviously, we don’t all work in Arizona. So how does this law affect a majority of people doing business in the United States? So far, the Grand Canyon state is the first with such a comprehensive and far-reaching law regarding prompt payment of contractors and subcontractors on private projects. Its enactment should send a clear message to all involved in the construction industry: know your rights. Additionally, the industry would do well to band together and encourage similar legislation in the remaining 49 states.
The current reality surrounding prompt payment issues is that the subcontractor must be cautious and aware when considering or signing contracts. Currently, few subcontractors can enjoy the protection that Arizona’s new law mandates. Therefore, subcontractors must assume responsibility for major contractual danger points and prepare to protect themselves. Savvy negotiators should pay close attention to the following considerations.
Owner’s Financial Condition
Conditional payment clauses in contracts are often worded so the subcontractor assumes risk for the owner’s non-payment. Getting a feel for the owner’s financial integrity can help you predict potential problems. A subcontractor is not guaranteed the right to review and personally verify an owner’s fiscal condition, but that doesn’t mean it’s a secret. General contractors have access to this information and you may attempt to obtain verification through them. The American Subcontractors Association (ASA) and Association of General Contractors (AGC) supply suggested guidelines and sample forms (such as the A201 and A401) to assist in this pursuit. Websites that provide helpful resources include www.contractorpress.com and www.constructionguidelines.org. For financial information for government projects, the U.S. Department of Treasury’s website supplies instructions for obtaining information via the Freedom of Information Act at www.ustreas.gov.
Waiving mechanic’s lien rights is rarely an advantageous move. These rights entitle you to place a lien on the owner’s project—as well as on money due to the contractor—if payment is not received. Unless some other security, such as a lender set-aside agreement or similar protective measure exists and provides similar, adequate protection, don’t waive the rights.
Pay-If-Paid Versus Pay-When-Paid
Just one word makes all the difference in these clauses. Pay-when-paid clauses affect the timing of payment, while pay-if-paid clauses make any payment of subcontractors conditional upon payment to the general contractor. General contractors can often avoid responsibility for payments to a subcontractor until the work has final approval, but—in most legal judgements involving a subcontractor’s right to prompt payment—only pay-when-paid clauses have received support. These clauses relieve the contractor of any obligation to pay the subcontractor until the owner has made payment. It is extremely rare for the court system to relieve a general contractor of all payment obligations through use of a pay-if-paid clause. Several states now have statutes protecting subcontractors from pay-if-paid clauses, but it is recommended that legal advice be obtained when negotiating complicated contracts.
Hold Harmless and Indemnity Obligations
Construction subcontracts can shield the general contractor, owner and owner’s design professionals from all claims, even if the claims are their fault. Make sure all hold harmless, and indemnity obligations are addressed specifically and covered by general liability insurance. An insurance representative is a good friend to have and can often prove as valuable as the coverage.
Most disputes occur over pay for extra work. For this reason you must remember four simple words: get it in writing. When written change orders are not available, check the contract for compensation on extra work. Make sure you know the rules of the game before rendering the extra service.
A Happy Ending?
Will Arizona’s prompt payment law affect legislation in other states? It is my hope that the industry—owners, contractors, subcontractors and suppliers—can work together toward a solution beneficial to everyone. In the meantime, subcontractors must be aware of their rights—and of the peril of signing a contract without truly understanding every clause.
Steve Green is the director of sales and marketing for Tubelite Inc., based in Reed City, Mich. Glaziers Guild appears bimonthly with rotating authors.
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