May 15, 2013

Managing debt collection as construction progresses


In my last column, I 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. Now I will discuss the steps contractors, subcontractors and suppliers can take to protect themselves against overdue accounts as construction on a project progresses.

If you are a subcontractor or supplier on a commercial or institutional project, find out if the contractor has posted a labour and material payment bond for the project. If so, you should obtain a copy. The bond will outline any time limitations imposed on a claim under it and provide particulars for giving notice in the event of non-payment. While owners and contractors will generally be cooperative in providing you with a copy of the bond, construction lien legislation in many jurisdictions requires them to provide you with said copy, upon request, from the moment you commence your supply of services or materials.

I recommend keeping your contracts and subcontracts at hand during the life of a project and either highlighting or summarizing the various notice requirements under those documents. Then, in the event of non-payment or a dispute, you will have easy access to the particulars of the form a notice should take, along with how it should be presented. This way, you can hope to avoid an argument over whether or not you failed to meet a key notice provision under the contract. To the extent subcontractors are bound by the provisions of the prime contract, i.e., between the owner and contractor, I would recommend keeping a copy of that contract as well, with highlights or summaries.

It is important to understand what role, if any, the owner’s consultant will play on the project. The prime contract generally spells this out. Its provisions will determine the extent to which and how the consultant will approve shop drawings, change orders and payment certificates, as well as his or her involvement in inspections, deficiency correction and dispute resolution. In each case, having a clear understanding of who is to do what will help you follow the contract provisions, and remove any excuse your client might have for not paying you.

Another good piece of advice for subcontractors and suppliers is to simply pay attention to what is happening on a job — beyond your own work. In many cases there are warning signs that something has gone wrong. Delay in a project is one example, although not in every circumstance. Sometimes, however, delays will result in a cash crunch and, ultimately, claims. So what should you look for?

If a project is significantly behind schedule, subcontractors and suppliers might ask around (at trade meetings or the coffee truck) to try to 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. All too often, an unresolved delay claim is a sign the contractor’s costs will escalate, creating a cash crunch. Where the contractor is arguably at fault, the owner may assess back charges against the contractor; this can only exacerbate the situation.

Suppliers and subcontractors should also be concerned if one or more trades do not appear to have enough workers on site. Where many trades are under-resourced, it may be that no one is getting paid on time. Where one trade is under-resourced, this trade might be the cause of significant delay. It is a particularly bad sign if the contractor who owes you the money is under-resourced.

So what should you do when you see, or hear, that problems are developing on a site? First, you should become more reluctant than you otherwise might be to perform extra work without the necessary approvals in place. The approvals should apply to both the change and the price of the change, if possible. Second, remember that by continuing to provide services or materials when you have not been paid, you are becoming a creditor of the person who owes you the money. When problems develop on site, you should be less willing to advance such credit. 

Often, the person who owes you money on a job will promise it is coming from the person above him. You may be asked to keep working, so as not to slow down the project. You can do a couple of things in response. Lien legislation often allows you to ask the owner about the status of the account between the owner and the contractor, so that you can determine if the contractor is telling you the truth about what is owed to him or her. We may find the contractor is really only hoping that a disputed claim will be approved. (Similar statutory requests can often be made of contractors and subcontractors, in addition to owners).

You can also insist that the person who owes you the money provide a direction that you be paid first. For example, the contractor could provide the owner with an irrevocable direction that the owner pay you monies owed to the contractor, until you have been paid in full. However, such a direction will only help you if the owner agrees money is owed.  If you are to use this option, you should ensure the owner is willing to honour the direction before you agree to provide additional services or materials.

Finally, during the life of the project, you might also consider using the written notice of lien, if available under applicable legislation, to put pressure for payment on those above you in the pyramid. This can have the same impact as the claim for lien itself. Of course, the claim for lien can give you both security and leverage, in the event you determine such a remedy is necessary.

In the next issue: Collection issues when our work is done!

Robert Kennaley has a background in construction and now practises construction law in Toronto and Simcoe, Ontario. He speaks and writes regularly on construction law issues, including on his blog: Rob can be reached for comment at 416-368-2522, at, or on LinkedIn. This material is for information purposes and is not intended to provide legal advice in relation to any particular situation. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.