November 1, 2015
Collection strategies during construction
BY ROBERT KENNALEY
My last column discussed ways contractors, subcontractors and suppliers might address debt collection, to better protect themselves if accounts become overdue, during the pre-construction, bidding and negotiation phases of a contract. This article will discuss the steps contractors can take during the life of the project, as construction progresses.
If you are a subcontractor or supplier, I recommend that, in the industrial, commercial or institutional contexts, you inquire to determine if a labour and material payment bond has been posted by the contractor in relation to the project. If a bond has been posted, you should obtain a copy, so you understand any time limitations imposed on a claim under the bond and so, in the event you have not been paid, you will have the particulars for giving your notice right at hand. While the owner and contractor will generally cooperate in providing you with a copy of the bond, construction lien legislation, such as the Construction Lien Act, section 39, in Ontario, allows you to require them to deliver a copy, upon request, from the moment you commence your supply of services or materials.
I also recommend contractors and subcontractors have their contracts and subcontracts at hand during the life of a project, and that they consider either highlighting or summarizing the various notice requirements under those documents. In this way, in the event of non-payment or a dispute, you will have at hand the particulars of the form of any notice required, along with how it should be provided, and when it must be received. This way, you can hope to avoid an argument over whether or not you failed to meet a key notice provision under the contract. Also, to the extent that subcontractors are bound by the provisions of the Prime Contract (between the owner and contractor) a copy of that contract (with highlights or summaries) might also be set aside.
It is also important that you understand what role, if any, the owner’s consultant will play on the project. This, again, will generally be spelled out in the Prime Contract. These provisions will determine the extent to which (and how) the Consultant will approve shop drawings, change orders and payment certificates. They will also spell out the extent to which the Consultant will be involved in inspections, deficiency correction and dispute resolution. In each case, having a clear understanding of who is to do what at hand will help you follow the contract provisions, and remove any excuse your client might have for not paying you.
Stay sharp on the jobsiteAnother good piece of advice is to simply pay attention to what is happening on a job — beyond our own work. In many cases, there are warning signs that something has gone wrong. Delay is one example. In many circumstances, of course, delays will not be an issue and everyone will be paid. In other cases, delays will result in a cash crunch and, ultimately, claims. So what can we look for?
If a project is significantly behind schedule, subcontractors and suppliers might ask around (at trade meetings or the coffee truck) to see if you can find out why. If the delay is attributable to the contractor or its forces, there might be a problem. If it is arguably the owner’s fault, you might find out if the contractor has made a claim for additional compensation and, if so, whether or not that claim has been approved or settled. An unresolved delay claim is a sign that, all too often, the contractor’s costs will escalate, creating a cash crunch. On the other hand, where the contractor is arguably at fault, the owner may assess backcharges against him, which can only exacerbate the situation.
Suppliers and subcontractors should also be concerned if one or more trades do not appear to have enough manpower on site. Where many trades are under-manned, it may be that no-one is getting paid on time. Where one trade is under-manned, this trade might be the cause of significant delay. It is a particularly bad sign if it is the person who owes you the money who is under-manned and potentially delaying the job
If there’s a problemSo what do we do when we see, or hear, that problems are developing on a site? First, we should become more reluctant than we otherwise would to perform extra work without having all necessary approvals in place. The approvals should specify both the change and the price of the change, if possible. Second, we should remember that by continuing to provide services or materials when we have not been paid, we are becoming a creditor. When problems develop on site, we should be less willing to advance such “credit” than we otherwise might be.
The person who owes us money on a job will often, of course, promise that the money is coming from the person above him. We will be asked to keep working, so as to not slow down the project. By way of example, let’s assume you are the landscape subcontractor who is owed money by the general contractor. In dealing with the contractor’s request that you keep working, there are a couple of things we can do. For example, in Ontario, s. 39 of the Construction Lien Act allows us to ask the owner what the status of the account is between the owner and the contractor. We can thus determine if the contractor is telling us the truth about what is owed to him. We may find that the contractor is really only hoping that a disputed claim will be approved. (Similar s. 39 requests can be made of contractors and subcontractors, as well as owners).
We can also insist that the person who owes us the money provide a direction that we be paid first. In our example, the contractor could provide the owner with an irrevocable direction that the owner pay us the monies it owes to the contractor, until we are paid. We should remember, however, that the direction will only help us if the owner agrees that it owes monies. If we are to use this option, we should ensure that the owner will honour the direction before we agree to provide additional services or materials.
Finally, during the life of the project, we might also consider utilizing the written notice of lien to put pressure on those above us in the pyramid to get us paid. The written notice of lien option was dealt with in a prior column, however, and will not be reviewed here. My next column, in January Landscape Trades, will look at collection issues when your work or supply is complete.
Robert Kennaley is a former landscape design build contractor and an Honorary Member of Landscape Ontario who now practices construction law in Toronto. He can be reached at 416-368-2522 or at firstname.lastname@example.org. This material is for information purposes and is not intended to provide legal advice. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.