As a construction lawyer, I deal with cases involving non-payment every day. Sometimes I represent the owner and on other occasions I represent the contractor or subcontractor. I have even represented sureties on payment related issues. No matter which company I represent, however, payment issues often come down to one single common denominator: a lack of practical planning combined with a failure to build contingencies into bids.
While pay disputes come in different forms and sizes, a common reason for non-payment is a legitimate lack of funds to make the required payment. Insufficient funds problems occur when a party fails to plan for contingencies in the budget and consider likely unknown but foreseeable circumstances. Among the worst mistakes is to budget only enough money to cover the cost of construction as laid out in the construction contracts. Change orders are inevitable, so plan for them.
When preparing or reviewing a bid, think practically about the scope of work and what it includes; and consider common unforeseen but as of yet defined problems. An easy example is subsurface rock for site contractors. It is common knowledge that contractors in this region often encounter this issue given the large shale deposits in the region, but it remains surprising how many construction companies don’t plan for the possibility that they might encounter subsurface rock. Another regular occurrence is having to terminate a problematic contractor and pay someone else to complete the terminated company’s scope of work at a premium. Whether that money is ultimately recovered or not, there must be enough money in the budget to carry that burden in the short run.
The number of common miscalculations is too many to address in one short blog post. The point, however, is made by simply stating you should plan for the unexpected. No matter where in the project chain you fall, give honest consideration to the cost to complete the project. Then factor in contingencies and other factors you might need to address. In so doing, you will have a more accurate budget and avoid a large number of payment issues on your project.