There is at least one universal truth in businesses of all kinds: no one likes to work for free. The risk of non-payment in the construction industry can be greater than in others because of the significant financial outlay that is required just to perform the work. Reimbursement for labor and material costs are required just to avoid losing money (not profit) on a job. And we all know what happens to companies that don’t at least break even most of the time.
One way to control the risk of non-payment is through the contract. There are a number of clauses – some obvious, others not as obvious – to review carefully with regard to payment issues. Here are a few to consider:
- The Payment Clause – Does it contain contingent payment language? If it does, is it “pay-if-paid” or “pay-when-paid”? It’s also important to be sure how soon after invoice you will be paid. These time frames can vary depending on the project and need to be matched up with when you are expected to pay subcontractors and suppliers.
- The Change Order Clause – What is the process for obtaining a change order? Can the party with whom I am entering the contract direct changes in scope to be done without an executed change order? Inquiring with the other party about financing to be sure they have sufficient funds to cover change order work is a good idea too.
- Waiver of Mechanic’s Lien Claims – What does the contract require in terms of a waiver? Many contracts are now requiring a broad form general release instead of a narrow waiver of liens. This has much broader implications. In some cases liens are not possible regardless of whether the contract allows it (i.e. public work). In those cases, inquire about the bonding situation and try to get a copy of any issued payment bond.
- “Financing Clauses” – Some of the AIA forms and other contracts have clauses allowing a party to inquire about the other party’s financial situation based on certain triggering events. Non-payment of an invoice is an example. This can be a valuable tool for several reasons, but understand whether this is provided for in your contract or not.
Contracts are not a cure-all for payment issues. They can put a company in a stronger position than they might otherwise be when a payment issue arises though. To do so, companies must understand the contract and be willing to rely on the terms in it to protect themselves. Finally, have a good attorney available to consult with on occasions where contracts are unclear or payment issues arise. A simple 10 minute conversation at the contract formation stage or before things get out of hand is probably worth having to avoid a much larger and more long-term problem.