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March 29, 2016

Over the past two years the construction industry has been hit hard by the downturn in the economy. When I talk with my construction clients, I hear the same complaint. Either there is no work and if there is work it is going so “cheap” many of you do not believe it is worth pursuing. Also there are more companies bidding the same work and driving the price down. In the last year I have lost one client to a bankruptcy, one has decided to shut down completely and liquidate its assets and another closed temporarily waiting for things to get better. These have been difficult situations since the client that was forced out of business I represented for over twenty years and the one that decided to voluntarily shut down I have represented for over thirty years. The ownership of both companies are good upstanding people but the significant downturn in the economy and its dire effects on construction just could not be overcome.

In these difficult times getting paid and managing your cash flow becomes even more difficult and important. Recently, I was asked by a subcontractor client who is owed several hundred thousands of dollars on four or five projects, “Do I have to go back and complete the work on a project when I have not been paid on past draw requests.” Unfortunately, my response had to be “It depends.” The “It depends” refers to what does your contract say. I asked the client to send me the subcontract and I would review its provisions and give an answer.

In reviewing the subcontract I found that while it had provisions for what the general contractor’s rights were for a breach by the sub, it did not provide for similar or any rights of the subcontractor for non-payment or any other breach by the general. Upon seeing that the contract was the general’s form and very one sided, I thought about the concept of an anticipatory breach i.e. the general not paying. However, as is typical the contract provided that the general contractor did not have to pay the subcontractor until the general received payment from the owner. I also looked at the provision of the subcontract dealing with change orders and found that it required a written change order issued by the general contractor and signed by the officer that signed the subcontract or his successor. I knew that my client did not want to go back and finish what was left unless past draws were paid and was looking for me to find some leverage to assert. I asked my client if there was any indication the general had gotten paid from the owner and in turn not paid him. The answer was “no”. I then asked about the change orders and were there any requests for extras that had been made but no change order issued by the necessary officer from the general. My thinking was that if the general contractor had not followed his own procedure my client could use this as the reason for not returning to the job and hopefully buy time that would result in a partial payment that would help his cash flow and prevent him from having to expend more money before receiving a payment. Unfortunately the answer was again “no”. All the required change orders had been issued and executed as necessary. Upon hearing this I had to advise my client that there was no basisfor not returning to the job and finishing what had to be done. Not the answer the client wanted but the correct answer. Otherwise my client would be in breach of contract. The general contractor could then take action against my client and declare a default.

The lesson to be learned is what you sign does matter. If the AIA General Contractor-Subcontractor agreement had been used it provides that the subcontractor can terminate the agreement if nonpayment continues for 60 days or longer. There is no pay if paid clause in the AIA subcontractor form agreement. While it is difficult to avoid using a general’s form agreement, if you are a subcontractor you need to know what it says and try to negotiate some rights for yourself if you can. If not at least you will know what situation you are in and govern your activities and cash flow accordingly. If you are a general contractor you need to be aware of what your rights are if the owner does not make timely progress payments. The same situation could apply to you.

The tough economic climate for the construction industry appears to be continuing for the foreseeable future. As such be careful of what you are signing and know that consequences do exist if the agreement does not protect you. In general the contract’s provisions are going to control your rights and duties. Accordingly, remember WHAT YOU SIGN DOES MATTER.