June 1, 2013

Managing construction debt collection as the project draws to a close


We complete our series of articles on debt collection issues with a discussion of what contractors, subcontractors and suppliers can do to protect themselves as a job moves toward completion. At this time, in particular, unpaid suppliers of services or materials must be careful to consider their options and prepare as well as document their files.

As last month’s column suggested, it is extremely important to understand the notice provisions and other contractual prerequisites to a claim. If your claim is for extras or delay, your contract will often impose conditions to be met in seeking payment. While a failure to meet these conditions might not be fatal to the claim, it is better to take the issue off the table rather than provide a reason for non-payment to the other side of a dispute.

A common mistake is the failure to properly put together the documentation necessary to support a claim. For instance, trades who seek additional compensation as an extra under their contracts often fail to properly track the work for which they are claiming. They may invoice for time and materials, for example, without documenting the support for the amounts claimed. 

Backup your claim
As lawyers brought in much later on to enforce the claim, we all too often find the backup to the claim sorrowfully lacking. Our clients might tell us they put two men on the extra work for eight hours, incurring $1,000 in material costs. Yet, by the time we have the file, the only backup to these costs are timesheets that show the men were on site for eight hours on the day in question. By then, of course, it is impossible for these men to tell us what they actually were doing on that day. This leaves the other side to argue the time might have been spent on the original scope of work, or on deficiencies. Further, if the actual invoices or materials price lists are not attached to back up your claim for material costs before the job is complete, it is often extremely difficult to locate such documentation later. The time to document the backup to your claim is when you are on site, while the information is readily available and details are fresh in your mind and your workers’.

It is important to respond to any suggestion that your work is incomplete or deficient, particularly as a project draws to a close. Often it is toward the end of the job when the owner and his or her consultant will issue deficiency lists. It is also all too common for a party who has run out of money on a project to issue somewhat dubious lists of deficiencies and incomplete work as a basis for non-payment. In addition, allegations of delay may be made as a way to offset your claim. These should also be responded to promptly.

Separate facts and settlement options
Claimants should also understand the difference between, and keep separate, correspondence that puts their factual position on the record from that which sets out their position on settlement. If the two are combined, any suggestion the claimant might take less could be admissible in a trial and taken as an admission the claim is not as strong as stated. Settlement proposals should be sent separately, and be clearly marked “without prejudice” so these letters will not be admissible in evidence.

I would also suggest settlement possibilities be explored at an early stage, because litigation can be very expensive and time consuming. If lawyers are to be involved, they should be brought in at an early stage to help protect your position and ensure all possible options are explored. These may include information requests under the Construction Lien Act, mediation or arbitration, bond claims, lien claims, trust actions and other legal proceedings. Your lawyer, if experienced in construction matters, should also be able to assist you, as required, to draft letters in response to allegations by the other side of delay or deficient and incomplete work.

It might seem easier to focus on getting the job done, leaving debt collection issues to be dealt with later. Yet contractors, subcontractors and suppliers who take steps to manage debt collection throughout the life of a project will generally find themselves in a better position to collect what is owed them.

Read the first two parts of Rob's series on Managing Debt Collection:
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 kennaley@mclauchlin.ca. 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.