It goes without saying that subcontractor management is a tricky businPA- Pay if paid.jpgess for those who select and contract with subcontractors in these interesting economic times. The earlier a general contractor can recognize the warning signs of a subcontractor’s financial troubles, the better. Early diagnosis of a subcontractor’s potential financial troubles can give a general contractor a chance to better protect itself from claims by unpaid vendors, sub-subcontractors and other entities. The following are some, but not all, of the warning signs that your subcontractor may be headed towards serious financial trouble:

  • Falling Behind Schedule – The subcontractor fails to complete scheduled activities and/or satisfy project milestones in a timely manner;
  • Late Deliveries – Material is delivered to the project site late and/or the wrong material is delivered to the project site;
  • Inquiries from Suppliers and Vendors Regarding Payment – Suppliers, Vendors, Sub-sub contractors and/or other entities contracting with the subcontractor begin to complain about late payment or non-payment;
  • Inadequate Manpower – The subcontractor fails to adequately man the project as it anticipated at the time the subcontractor bid the work;
  • Failure To Document – The subcontractor fails to submit required documentation in a timely manner, such as daily reports;
  • Equipment – Equipment the general contractor expects to see at the project site is absent or, if it appears at the project site, fails to function properly;
  • Excessive Claims – The subcontractor begins to submit an excessive number of claims and/or notices of potential claims; and
  • Asks for advance payment – The subcontractor requests advance payment and/or expresses concern about the flow of payment.

The presence of one or several of these factors on a particular project site may indicate that a subcontractor is headed for financial trouble. In this event, a savvy general contractor who has the right provisions in its contract can employ certain policies and procedures at the jobsite to minimize or protect itself from claims by vendors, suppliers and/or other sub-sub contractor entities. For instance, the general contractor may be able to pay by “joint check” (i.e. checks that name the subcontractor as well as the sub-subcontractor or supplier for whose work or materials are at issue). Also, the general contractor might be able to mandate that releases of all claims to date be executed before making any payment. Finally, the general contractor might, if necessary, call on the payment and performance bonds provided by the subcontractor. In order to utilize these strategies, however, critical contract provisions that address each of these issues must have been made part of the parties’ contract. In the coming months, we will examine the force and effect of specific contract provisions.

 

Jennifer M. Horn is Senior Counsel at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate.