Builders and Contractors Exchange
Weekly Bulletin: 25 Oct 2004
Securing Payments On Construction Projects Part 1 – Before You Start The Work
By: John Lockard
The risk of non-payment is one of, if not the most, significant risks faced by any contractor on a construction project. The owner or general contractor could become insolvent, or contract payments may be withheld due to disputes over the performance of the work. In this first in a series of three articles, we will discuss what the contractor should consider before beginning the work in order to improve its position with regard to payments.
The contractor should first evaluate the "credit worthiness" of the other party to its contract. If the contract is with a corporation, it is very unlikely that the contractor will be able to look to the principals of the corporation to be personally responsible to pay any debt. The corporation, however, may not have assets of any value. If the contractor has concerns about the ability of the other party to make payments, then it may want to obtain the personal guarantee of one of the corporate officers or make some other arrangement to ensure payment.
The contractor also needs to know its mechanic's lien and payment bond rights before it begins the work. A contractor cannot file a mechanic's lien on a public construction project, but it may not have any rights against the payment bond on certain federal construction projects. The contractor may also need to take certain actions at the beginning of the project in order to preserve its lien rights. For example, the contractor must provide notice to a mechanic's lien agent at the beginning of its work on certain residential projects or it will lose its lien rights.
Finally, the contractor should carefully review the proposed terms of its contract. Who bears the risk of non-payment if the owner becomes insolvent? Can the contractor recover its attorneys' fees if it files a lawsuit to collect amounts owed? Contract clauses addressing these issues can affect the ability and the cost to collect amounts owed.
These are only examples of issues that face contractors before they begin their work or sign the contract. Contractors should consult with an experienced construction attorney if they have any concerns about their rights.
In the next article, we will discuss steps that contractors should take during the course of construction to help ensure they are paid.
Questions?
If you have any questions about this article or any other related matters, please contact:
This article is meant to bring awareness to this topic and is not intended to be used as legal advice.