Despite the feeling of success achieved upon placing an order, manufacturing a component to specification, and on-time or even early delivery of a project, these successes depend on the ultimate achievement of getting paid for one's performance, labor, equipment and/or materials.
In good times and particularly in challenging economic times, the failure of payment for performance will not only cause a direct impact to your business and operations, but also, potentially, to those suppliers, subcontractors and consultants who assisted you in the delivery of the required project, materials, components and services. You may want to make certain they have been compensated to allow them to continue operations, avoid your own litigation and avoid impacting future deliveries. However, being required to make such a payment in the absence of payment to you by the ultimate purchaser may leave your company in an impaired position.
All is not lost. In even the most difficult times, steps are available to help secure payment on your given project for the performance you have delivered. This by no means suggests that these tips are the only methods of enhancing your prospects for payment. Nevertheless, they should be at the top of your list for navigating through these difficult economic waters to a prompt and proper payment.
1. Read Your Contract.
It may go without saying that your contract should be consulted when identifying obligations of payment. Often the contract's provisions are overlooked when it comes time to insist there is a failure of payment on the project. Consider the recourse provided by Sections 2.1.2 and 2.2.1 of the Washington, D.C.-based American Institute of Architects' A201 General Conditions of the Contract for Construction, 2007 Edition. The sections provide the following:
2.1.2 The Owner shall furnish to the Contractor within 15 days after receipt of a written request, information necessary and relevant for the Contractor to evaluate, give notice of or enforce mechanic's lien rights. Such information shall include a correct statement of the record legal title to the property on which the Project is located, usually referred to as the site, and the Owner's interest therein.
2.2.1 Prior to commencement of Work, the Contractor may request in writing that the Owner provide reasonable evidence that the Owner has made financial arrangements to fulfill the Owner's obligations under the Contract. Thereafter, the Contractor may only request such evidence if (1) the Owner fails to make payments to the Contractor as the Contract Documents require; (2) a change in the Work materially changes the Contract Sum; or (3) the Contractor identifies in writing a reasonable concern regarding the Owner's ability to make payment when due. The Owner shall furnish such evidence as a condition precedent to commencement or continuation of the work or the portion of the Work affected by a material change. After the Owner furnishes the evidence, the Owner shall not materially vary such financial arrangement without prior notice to the Contractor.
These sections still are powerful tools for securing payment for performance and setting conditions for further performance in the event the owner's financial situation becomes a concern. These provisions, or those like them, should be considered and consulted whenever there is an incident or circumstance arising on the project that would give rise to financial security concerns on the part of the contractor or supplier, as the case may be.
2. Liens Are a Means.
Another important and powerful tool for pursuing and securing the right to payment for performance are the mechanic's and/or materialmen's lien statutes that exist in all 50 states. While it would be impossible to analyze every unique statute in an article of this size, some significant general features are identified below.
Initially, a mechanic's lien presents a mechanism whereby a lien can be placed on the owner's property prior to any hearing taking place as to the validity of that claim. In exchange for this unique and valuable right, there are rigid requirements, including registrations to do business in certain jurisdictions and notices to various participants in the project. In some instances, even before the work starts, prior notices of intention to pursue the lien and compliance with the requirement for filing and perfecting the lien claim are required. Because these liens can provide priority security interests greater than those of lending institutions, it may be a method to, at a minimum, get immediate attention for your claim and also exert appropriate leverage against a project to ensure your payment is being placed at the top of the list for satisfaction.
3. Bond . . . Surety Bond.
On many projects, an owner may have required as a part of the contracting obligation that the contractor supply a performance and/or labor and material payment bond. These instruments are commitments by a third-party surety company that they will stand behind and assure, not insure, the contractor/principal's performance obligation. That performance obligation at times can include, particularly in the case of the labor and material payment bond, the prompt and proper payment of the subcontractors, suppliers and other named "obligees" identified directly or by category in the surety bond, as well as any incorporated documents.
Much the same as in the mechanic's lien scenario, the bond terms should be complied with to assure the maximum potential of recovery. This requires securing the bond as soon as possible, not just when payment may be a concern. Another significant feature is being a proper claimant under the bond. Should it be determined upon a review of the bond that you may not be within a protected category, it may be very worthwhile to secure another means or mechanism of securing payment.
4. Putting Trust in a Trust.
In some jurisdictions, payment by an owner to a contractor can result in the imposition of trust obligations for that compensation. Indeed, failure to provide payment to the subcontractors and suppliers who have provided the performance on which the contractor has obtained that compensation from the owner may result in significant penalties to the contractor. You may want to evaluate whether there are such provisions available on your project. Reminding the contractor of such an obligation may very well get the contractor's attention focused on satisfying its payment obligations to you before others' competing demands for payment are addressed.
Some of those provisions are found in the body of the contract documents and may be means by which to alert the owner that the contractor has not fulfilled its compensation requirements in a prompt or contractually compliant fashion. Again, this may be sufficient leverage to cause the contractor to issue payment to the subcontractor or supplier, even when previous requests or phone calls have gone unnoticed.
5. Payment Potpourri.
The last tip for persuading payments when prior promises were possibly prevarications involves a multitude of potential mechanisms for encouraging compensation. For example, many jurisdictions are adopting or already have adopted prompt-payment acts containing methods for securing penalties and attorneys' fees if a suit has to be commenced to secure payment.
Another avenue to investigate is the existence of joint check provisions in the owner-prime contract agreement that can be activated by an owner on notice from a subcontractor or supplier that a contractor has not been meeting its obligations.
Yet another potential means to secure payment, aside from the potential of presenting a mechanic's lien against the project, resides with an escrow account or some other level of security, including a parent-company guaranty, that can be called upon to address payment where there has been a default in compensation obligations.
Finally, there is the serious but sometimes necessary possibility of terminating the contract based on the material breach of failure of payment. While such an action should be taken with great caution, it sometimes provides the only method of cutting off future exposure while putting significant amounts of leverage on the owner that in the event payment is not made no further performance will be provided.
Just as diligence is required at times to successfully conclude the initial procurement, contract or sale, and diligence is required to meet the standards and timetables for performance, diligence also is required to ensure that procurement and performance translate to payment at the end of the day. With so much at stake on any job, particularly in economic climates where continued cash flow is of great significance, pursuing these avenues may be a road to financial recovery.