The Contractor's Compass January 2015

THE

ASA’s

THE OFFICIAL EDUCATIONAL JOURNAL OF THE AMERICAN SUBCONTRACTORS ASSOCIATION

WWW.ASAONLINE.COM

Prompt Payment and When/How to Suspend Work

JANUARY 2015

Getting Paid

Reducing Your Credit Risk and Default Receivables Through Management of Lien and Bond Claim Compliance Elements of Cash Flow Management and Getting Paid Pay-If-Paid Clauses: What You Need to Know Legally Speaking: Contingent Payment Clauses— Enforceable?

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THE

ASA’s

January 2015

Features EDITORIAL PURPOSE The Contractor’s Compass is the monthly educational journal of the Foundation of the American Subcontractors Association, Inc. (FASA) and part of FASA’s Contractors’ Knowledge Network. The journal is designed to equip construction subcontractors with the ideas, tools and tactics they need to thrive.

Tips for Suspending Work for Non-Payment Without Getting Fired......................................................................... 6

The views expressed by contributors to The Contractor’s Compass do not necessarily represent the opinions of FASA or the American Subcontractors Association, Inc. (ASA).

Reducing Credit Risk and Default Receivables Through Management of Lien & Bond Claim Compliance.................... 10

by Jason Ebe, Esq.

by Scott Wolfe

EDITORIAL STAFF Editor-in-Chief, Marc Ramsey

Green Is Good: Getting Paid and Ensuring Cash Remains King.......................................................................... 12

MISSION FASA was established in 1987 as a 501(c)(3) taxexempt entity to support research, education and public awareness. Through its Contractors’ Knowledge Network, FASA is committed to forging and exploring the critical issues shaping subcontractors and specialty trade contractors in the construction industry. FASA provides subcontractors and specialty trade contractors with the tools, techniques, practices, attitude and confidence they need to thrive and excel in the construction industry.

FASA BOARD OF DIRECTORS Richard Wanner, President Letitia Haley Barker, Secretary-Treasurer Brian Johnson Robert Abney Anne Bigane Wilson, PE, CPC

by Gregg Schoppman

What Subcontractors Need to Know About ‘Pay-When-Paid’ and ‘Pay-If-Paid’ Clauses................................. 15

by Eric Travers, Esq.

Departments

SUBSCRIPTIONS The Contractor’s Compass is a free monthly publication for ASA members and nonmembers. Subscribe online at www.contractorsknowledgedepot.com.

CONTRACTOR COMMUNITY............................................................ 4

ADVERTISING Interested in advertising? Contact Tony Kozak at (716) 844-8174 or advertising@asa-hq.com.

LEGALLY SPEAKING.......................................................................... 18

EDITORIAL SUBMISSIONS Contributing authors are encouraged to submit a brief abstract of their article idea before providing a fulllength feature article. Feature articles should be no longer than 1,500 words and comply with The Associated Press style guidelines. Article submissions become the property of ASA and FASA. The editor reserves the right to edit all accepted editorial submissions for length, style, clarity, spelling and punctuation. Send abstracts and submissions for The Contractor’s Compass to communications@asa-hq.com.

Contingent Payment Clauses: Enforceable? Negotiable? Worth the Risk?

by Matthew Meaker

Quick Reference

ABOUT ASA ASA is a nonprofit trade association of union and non-union subcontractors and suppliers. Through a nationwide network of local and state ASA associations, members receive information and education on relevant business issues and work together to protect their rights as an integral part of the construction team. For more information about becoming an ASA member, contact ASA at 1004 Duke St., Alexandria, VA 22314-3588, (703) 684-3450, membership@asa-hq.com, or visit the ASA Web site, www.asaonline.com.

ASA/FASA CALENDAR..................................................................... 20 COMING UP....................................................................................... 20

LAYOUT Angela M Roe angelamroe@gmail.com © 2014 Foundation of the American Subcontractors Association, Inc.

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Contractor Community New Defense Authorization Will Limit Use of Reverse Auctions on Construction ASA-supported amendments are included in the National Defense Authorization Act of 2015, signed by the president on Dec. 19, 2014.

“While we’re pleased that Congress has started to address the construction industry’s concerns with the federal procurement system, ASA is disappointed that the final bill did not eliminate reverse auctions on construction government-wide and did not regulate the use of individual surety bonds,” said ASA Chief Advocacy Officer E. Colette Nelson.

Both of these provisions were approved by the House in Spring 2014 but ran into opposition in the Senate. The ASA-supported provisions in the final NDAA include: • Reverse Auction Reform. This amendment limits the use of reverse auctions by DOD by banning its use of single-round reverse auctions, single-bid reverse auctions absent price protections, third-party reverse auctions that include inherentlygovernmental functions or private past performance evaluations, and reverse auctions for design-build work.

• Design-Build Bidding Reform. This amendment simplifies the multistep process of competing for design-build contracts within DOD. • Contract Data and Bundling Accountability. This amendment brings more transparency to data reported on bundled and consolidated contracts.

Nelson said that ASA and the other members of the Construction Industry Procurement Coalition intend to continue to seek the regulation of individual sureties, to extend the tenets of the Miller Act to federal public-private partnerships, eliminate the use of reverse auctions on construction government-

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wide, and other provisions that will improve the ability of contractors and subcontractors to successfully perform on federal construction. Other procurement-related provisions in the bill that will impact subcontractors are: • Comprehensive Subcontracting Plan Reform. These amendments increase the transparency and accounting in the Test Program for Negotiation of Comprehensive Small Business Subcontracting Plans.

• Women-Owned Small Businesses.

This amendment permits solesource contracts for Women-Owned Businesses and EconomicallyDisadvantaged Small Businesses if there is only one WOSB or EDWOSB that can perform the work and the value of the contract is below $4 million. This provides WOSBs and EDWOSBs with the same solesource authority currently available to HUBZone and Service-Disabled Veteran-Owned Small Business firms.

Congress Approves OneYear Tax Extenders Bill In the closing hours of the 113th Congress, both the House and Senate passed a bill to retroactively renew dozens of expired tax breaks for 2014 only. The bill, which President Obama signed on Dec. 19, 2014, includes the extension of Internal Revenue Code Section 179 deduction limits and the 50 percent bonus depreciation provisions, both of which expired on Dec. 31, 2013.

In a Nov. 21, 2014, letter and extensive earlier lobbying, ASA called on Congress to make both of these provisions permanent. ASA Chief Advocacy Officer E. Colette Nelson said, “While this should make tax filing season easier for subcontractors and their tax preparers, it ensures that legislators will be back at the negotiating table on tax extenders, and undoubtedly corporate tax reform as a whole, next year.”

For more information on the tax extenders, see ASA’s Special Report

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on Federal Tax Provisions that Expired in 2013 and 2014 and Action to Extend Them.

ASA Expresses Concern About Impact of President’s Immigration Reform Actions ASA told the White House that it has serious concerns about the President’s executive actions on immigration because of the obstacles it appears to raise to a more permanent legislative solution. The President’s Immigration Accountability Executive actions, issued on Nov. 20, 2014, are intended to increase security on the border and defer immigration legal proceedings against nearly 5 million undocumented workers who are otherwise in compliance with the law.

“Although ASA has been disappointed in the failure of Congress to act on this critical legislation, the Association is concerned that this temporary executive action will deter bipartisan work not only a permanent solution to our broken immigration system, but also on other solutions needed for other challenges, including infrastructure funding, tax reform, and acquisition improvement,” ASA said.

The United States Citizenship and Immigration Services will begin implementation of the expanded Deferred Action for Childhood Arrivals around Feb. 20, 2015, and the new deferred action for parents of U.S. citizens and unlawful permanent residents around May 20, 2015. This will give USCIS and other agencies responsible for implementing these initiatives time to prepare and issue regulations, instructions and other documents needed to implement them.

For more than a decade, ASA has supported clear, sensible reform of the immigration system that: • Strengthens national security by providing for the screening of foreign workers and creating a disincentive for illegal immigration.

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• Addresses future economic needs

for workers through the creation of a guest worker program.

• Practically addresses undocumented workers already in the United States.

• Functions efficiently for employers and workers, including an accurate, reliable and effective system to verify employment eligibility.

• Can be efficiently and vigorously enforced by government agencies.

• Allows hard working, tax paying undocumented workers to earn legal status.

• Ensures that U.S. workers are not displaced by foreign workers.

• Ensures that all workers enjoy the same labor law protections.

ASA, ASAC Urge California Supreme Court to Correct Appeals Court’s Error in Mechanic’s Lien Case ASA and ASA of California asked the California Supreme Court to grant a petition for review, or at the least de-publish the case of Moorefield Construction v. Intervest-Mortgage Investment Company, because the appeals court’s misinterpretation of state civil code adversely impacts the construction industry and the right to secure payment via a mechanic’s lien.

“ASA is deeply concerned that allowing subordination of mechanic’s lien rights has severe implications to payment protection in the construction industry and contrary to the intent of the California Mechanic’s Lien laws threatens security for payment to all who improve real property,” E. Scott Holbrook, Jr., Crawford & Bangs, LLP, Covina, Calif., wrote on behalf of ASA and ASAC in a Nov. 25, 2014, letter to the California Supreme Court. “The Court of Appeals decision impairs lien rights under the current Civil Code Section 8122 and allows the Constitutional right of mechanic’s lien to be affected by contract which is against the stated public policy of California.”

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Because of the appeals court’s error, Holbrook wrote, “the general public policy and California Constitutional right to mechanic’s lien stated in Wm. R. Clarke Corp. v Safeco Ins. Co. … would be irreparably harmed if the Court of Appeal’s decision is allowed to stand because the risk of subcontractors and/ or general contractors being allowed to subordinate mechanic’s liens when contracting irreparably impairs the fundamental California Constitutional right to a mechanic’s lien. Such a result would introduce uncertainty into contracting (as to what is or is not enforceable or permitted), would engender disputes and create conflicts and inconsistencies with the California Code, and run counter to the public interest in assuring payment to those who provide construction labor and materials to projects to improve real property in California. … Clearly, ASA urges this Court to correct this error by granting certification to review the decision or, at the minimum, depublishing the decision.”

OFCCP Issues Rule Banning Discrimination on Sexual Orientation/Gender Identity Effective April 8, 2015, contractors and subcontractors doing business with the federal government will be prohibited from discriminating in employment decisions on the bases of sexual orientation and gender identity.

The new rule, which was issued by the Office of Federal Contract Compliance Programs on Dec. 9, 2014, implements Executive Order 13672, which was signed

by President Obama on July 21, 2014.

The new rule applies to federal contracts entered into or modified on or after April 8, 2015. While 18 states, the District of Columbia and many businesses, large and small, already offer workplace protections to lesbian, gay, bisexual and transgender employees, July’s executive order was the first federal action to ensure LGBT workplace equality in the private sector.

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OFCCP is responsible for implementing EO 11246, Section 503 of the Rehabilitation Act of 1973 and the Vietnam Era Veterans’ Readjustment Assistance Act of 1974. These three laws require contractors and subcontractors that do business with the federal government to follow the fair and reasonable standard that they not discriminate in employment on the basis of sex, race, color, religion, national origin, disability, status as a protected veteran, and now sexual orientation and gender identity. For more information on the new rule, visit http://www.dol.gov/ ofccp/LGBT/.

DOL Partners with 17th State on Worker Misclassification On Nov. 12, 2014, the U.S. Department of Labor signed a memorandum of understanding with New Hampshire, making it the 17th state to partner with the federal government to prevent and detect employers from misclassifying employees as independent contractors.

Under this agreement, both agencies will share information and coordinate law enforcement under the Fair Labor Standards Act, the Occupational Safety and Health Act, and the Employee Retirement Income Security Act. U.S. Secretary of Labor Thomas E. Perez said, “Misclassification of employees deprives workers of rightfullyearned wages and workplace protections and undercuts law-abiding citizens.”

The DOL has signed similar agreements with other states including Alabama, California, Colorado, Connecticut, Hawaii, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, New York, Utah and Washington. Several states, including California and Texas, are expected to consider legislation strengthening enforcement of their laws governing employee misclassification during 2015.

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Feature Tips for Suspending Work for Non-Payment Without Getting Fired

by Jason Ebe, Esq. All work and no pay making you crazy? A temporary suspension of work may be an appropriate selfhelp remedy for an owner’s or contractor’s non-payment. Although termination of the subcontract for the material breach of non-payment by the contractor may be warranted in certain circumstances, suspension may be more appropriate if the reasons for non-payment can be cured and the parties can, following suspension, payment and resumption of work, achieve the goals and realize the mutual benefits of the completed subcontract.

Suspension of work may involve pulling crews off the site, and, for longer suspension periods, actually demobilizing from the work site.

IN THIS ARTICLE . . . �

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Suspending work may have significant consequences. Understand the applicable law.

Some subcontracts provide that you have the right to suspend work for nonpayment.

Many jurisdictions have enacted prompt pay laws for public and/or private work.

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Suspension is an actual stoppage of work, albeit a temporary one. This is different from reducing crew sizes or otherwise a slower pacing of the work.

For example, if the owner has paid the contractor, but the contractor has not paid the subcontractor because of reasons other than the deficient performance of work by the subcontractor, and the contractor is unresponsive to the subcontractor’s attempts to communicate with the contractor to resolve the nonpayment issue, but the subcontractor reasonably believes that payment should be forthcoming, and does not wish to jeopardize the project and/ or relationships by terminating the subcontract, a suspension of work until payment is received may be what is needed to force the contractor to honor its subcontract obligations of prompt payment to the subcontractor.

To be clear, although suspension of work is not as severe an action as termination of the subcontract, the consequences can be significant, especially if the subcontractor’s work is on the critical path of the contractor’s schedule. Before suspending work, or even threatening to suspend work, the subcontractor should review and understand the applicable contract provisions and law affecting such action, communicate with the contractor and document the reasons for the suspension in advance,

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and seek out experienced and knowledgeable construction counsel to evaluate whether the benefits of suspension outweigh the risks.

Know Your Contractual Rights Some, but not all, subcontracts provide that the subcontractor has the right to suspend work for non-payment. For example, ConsensusDocs Form 750, Standard Agreement Between Constructor and Subcontractor (© 2011, Revised 2014), provides that if the constructor has received payment from the owner and does not make payment to the subcontractor for any reason not the fault of the subcontractor, or if the constructor has failed to pay the subcontractor within a reasonable time for the subcontract work satisfactorily performed, the subcontractor may, upon giving seven days’ written notice to the constructor, stop work until payment of the full amount owning to the subcontractor has been received (§ 8.2.6). Form 750 further provides that the subcontract amount and time shall be adjusted by the amount of the subcontractor’s reasonable and verified cost of shutdown, delay, and startup (§ 8.2.6). To best ensure the use of Form 750, ASA recommends the use of the ASA Subcontractor Bid Proposal, which states in paragraph 2: “Subcontractor and Customer will execute a ConsensusDocs 750 subcontract form to memorialize their agreement, supplemented and modified as provided by this bid proposal which shall be

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Learn How to Get Paid on TIme incorporated by reference into the final subcontract.”

For subcontract forms that don’t contain the foregoing or similar language, ASA recommends the use of the ASA Subcontract Addendum, which provides in paragraph 5: “Should Subcontractor’s payment be delayed because (a) Customer fails to receive timely payment of amounts certified and approved, or (b) Customer fails to make timely payment after itself receiving payment for Subcontractor’s work, or (c) because Customer’s payments are not received by Customer for reasons not the fault of or directly related to Subcontractor’s work, then Subcontractor may suspend work after giving at least seven (7) days written notice to Customer of the intent to suspend and the date of

Getting paid on time and in full is part science

intended suspension.” and part art. Learn strategies for preventing Subcontractors payment delays and non-payment with the negotiating the FASA video-on-demand, “The Art and Science contractor’s proprietary of Getting Paid” (Item #8054), presented by Michael Pappas, Esq., Miles & Stockbridge, subcontract forms Baltimore, Md. This 94-minute on-demand should make use of the video is $65 for ASA members and $95 for ASA Subcontractor’s nonmembers. Order online.

Negotiating Tip Sheet for Inability to Stop Work for Nonpayment. This such language, a subcontractor who tip sheet provides useful stops work for non-payment may responsive negotiating tips to such be at grave risk of breaching its common contractor arguments such subcontract, unless the law applicable as: “I can’t worry about you stopping to the subcontract allows the work;” “This is an unreasonable subcontractor to do so. request;” “I just don’t get why you think you need this;” and “This isn’t industry practice.”

Know Your Statutory Rights The foregoing and similar Many jurisdictions have enacted language grants powerful rights to prompt pay laws for public works subcontractors to suspend work for and/or private construction projects. non-payment. However, without

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Prompt Payment in the 50 States Subcontractors should familiarize themselves with the applicable laws in the states in which they perform work, as well as the laws made applicable by virtue of subcontract choice-of-law clauses. For example, in Arizona, for private construction projects, A.R.S. § 32-1129.04 provides that a subcontractor may suspend performance if the contractor fails to pay the subcontractor, whether the owner pays the contractor for the subcontractor’s work or the owner approves but fails to pay the contractor for the subcontractor’s work (the statute does not authorize suspension if the owner timely and properly objects to payment for the subcontractor’s work). The statute further provides that a subcontractor shall not be deemed in breach of the subcontract for suspending performance pursuant to the statute, and that a subcontractor that suspends performance is not required to resume until it is paid the amount approved, together with any costs incurred for mobilization resulting from the suspension.

Get the most current information regarding state laws on prompt payment for commercial construction with Prompt Payment in the 50 States. This manual from ASA and FASA charts the state-by-state breakdown of such details as the time frame for payment between owners and prime subcontractors; primes and subcontractors; and subcontractors to lower-tier subcontractors. Prompt Payment in the 50 States is a no-cost benefit for ASA members and is available in the members-only section of the ASA Web site.

subcontractors been paid? Timely communication is key. Also, in some instances, the squeaky wheel gets the grease. Whatever the reasons, and whatever the communications, it is important to contemporaneously document the circumstances, project status, and communications. Write to the contractor to recite what work was performed, what billings were submitted, what payments were due, what reasons, if any, were given for non-payment, and what needs to be done to address the situation. If suspension is anticipated, document the status of the subcontractor’s work as well as the other ongoing (or suspended) work, the anticipated schedule for the subcontractor’s work if not suspended, the anticipated suspension period (if known), Communicate and Document the costs of demobilization and remobilization, and other costs A subcontractor that has not received timely payment for its work related to the suspension that may be sought in addition to the should promptly investigate the regular payments owed. The more reasons for non-payment. Has the owner paid the contractor? Have other information the subcontractor,

When Should You Send a Customer to Collection?

One of the most difficult decisions a subcontractor faces is when to send a customer to collection. On the one hand, the subcontractor needs to get paid for work performed or services provided. On the other, keeping a customer happy to ensure repeat business is critical. Robert Andreu, Hunter Warfield, Tampa, Fla., answers this difficult question in the videoon-demand, “Collection Strategies for Subcontractors” (Item #8064). Learn how to design an in-house debt collection process and discover steps to accelerate the collection of past due debts. This on-demand video is $65 for ASA members and $95 for nonmembers. Order online.

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contractor and, if appropriate, the owner have regarding the reasons for, and the anticipated effects of, the suspension, the more informed decisions each affected party can make as to whether suspension is an appropriate action in response to nonpayment.

Get a Second Opinion Subcontractors who believe they have the right to suspend work and that a suspension is the best course of action should … take a deep breath, and contact knowledgeable and experienced construction counsel, before taking that action. Counsel can quickly review the facts, analyze the applicable contract and/or statutory language, and evaluate the pros and cons of suspending work compared to other action or no action. Even though suspension is different from, and less final than, termination, suspension can still prompt an aggressive and adverse response from the owner and/or contractor, and should be used sparingly.

Jason Ebe is a partner with the Phoenix, Ariz., office of Snell & Wilmer LLP, a full-service business law firm with more than 400 attorneys in eight offices throughout the Southwest. Ebe is a member of ASA and represents subcontractors and other clients in construction transactions and disputes. He can be reached at jebe@swlaw.com.

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Feature Reducing Credit Risk and Default Receivables Through Management of Lien & Bond Claim Compliance

by Scott Wolfe Most of the time, invoices are paid well before they age to a worrying degree. But, it’s no secret that getting paid (and getting paid on time) is difficult for many participants in the construction industry. This has led to construction participants having some of the highest failure rates of any industry. Because of this, Construction Financial Managers and other A/R or credit professionals can have a hard time helping companies manage, and ultimately collect, problem invoices.

Typically, the unique structure of the payment chain on a construction project generates two distinct areas of concern: (i) Getting invoices paid faster; and (ii) Reducing the number of invoices that are written off as uncollectable.

While these are two

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The longer an invoice goes unpaid, the greater the chance of it being written off.

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Create a receivables management funnel that gets you paid on every project.

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To get paid every time, a company needs to influence the prioritization of its invoices.

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separate goals, they are fundamentally linked. The longer an invoice goes unpaid, the greater the chance of it eventually being written off. In fact, in response to survey data about B2B receivables, 52 percent of the value of receivables more than 90 days overdue was eventually written off as uncollectable.

Construction A/R Problems Both the complexity and structure of the payment process can lead to slow or non-existent payment in the construction industry, and the tenuous financial position of many construction industry participants doesn’t help invoices to get paid. Despite these inherent challenges, however, steps can be taken to minimize these risks.

Construction industry participants are in a unique position to leverage specialized security interest to dramatically reduce credit risk and default receivables. The use of these security rights provided through mechanic’s liens and bond claims, can completely reinvent a construction industry company’s A/R. Extensions of labor and/ or materials on credit in a secure position get paid much more often than unsecured extensions of credit. And, keeping all invoices on a project in a secured position from the start results in invoices being paid more quickly. The security provided by mechanic’s liens and bond claims was specifically provided in response to the challenges and unique circumstances of the construction industry.

Nearly every party that supplies materials,

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equipment, or labor to a construction project has the right to use the value of the property being improved as collateral to guarantee payment.

This ability provides parties in the construction industry with a unique ability to combat credit management challenges.

The question, then, is how to fully use the security rights available. Creating a solid and routinely followed credit policy and developing a receivables funnel to take advantage of the security rights available to the construction industry, can result in the reducing DSOs and the practical elimination of bad-debt write-offs.

The Receivables Funnel The first step in creating a receivables management funnel that gets you paid on every project is to understand why customers aren’t paying in the first place. Why aren’t solvent companies paying their bills? The truth is that they are — they just aren’t paying yours. As was discussed above, the structure of payment on a construction project is convoluted and unique.

Since many companies are required to float significant costs, while waiting for payment from other parties, these companies are oftentimes forced to make decisions as to which invoices to pay on time. Figuring out which bills to pay when comes down to an evaluation of which bills should be prioritized. In fact, there are software programs specifically designed to assist companies in making the determination of which invoices should receive the highest priority, and which are more easily allowed to slip.

In order to get paid every time, then, a company needs to influence the prioritization of its invoices, which can be accomplished by keeping your invoices in a secured position, and

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making sure that your customer (and everybody else up-the-payment chain) knows you’re on the project, and that your invoices are secured. With some limited changes possible company-tocompany, a proper receivables funnel for construction industry participants should be composed of the following steps:

1. Beginning of Project: Send preliminary notice to protect mechanic’s lien rights and inform parties of your involvement.

2. After Account in Default: After a relatively short set period of time, send a notice of intent to lien to urge payment.

3. If payment not received within a certain set number of days after NOI sent: File a mechanic’s lien to secure the debt with the property itself.

4. If mechanic’s lien not paid within a certain set number of days: Send to collections.

5. If mechanic’s lien not paid within four months: File a foreclosure/lien enforcement suit.

While all steps are important, very few projects will make it to the third step before payment is received. Of the projects that do make it that far, even fewer will ever reach Steps 4 and 5. In fact, if you stick to the policy of sending a preliminary notice on every project, and sending a Notice of Intent if payment is not promptly received, you can expect to actually file liens on only 1 percent to 2 percent of your total projects.

Does It Work? And How? The process outlined above is a stepby-step checklist to remain in a secured position on every project. Remaining in a “secured position” means that the work performed or materials provided on credit, are secured (backed by a security interest in collateral). This serves to reduce the risk associated with extending material or work on credit because of the ownership right in an asset that may be claimed in the event of a default by an indebted party. In the

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construction industry, the collateral to secure the debt is the property being improved itself. A valid mechanic’s lien allows the property to be sold to satisfy the claim — if it comes to that.

Luckily for both the lien claimant and the property owner, however, it rarely does. And, the mechanic’s lien security interest can also position a creditor in to recover in the face of another party’s bankruptcy. This is pretty good protection.

Creating and implementing a thorough and well-crafted credit policy as a whole, (with special attention given to the notice and lien policy subparts and the receivables funnel as outlined above) is an incredibly powerful way to collect the money you are owed on every project.

In a fairly recent case-study performed on a medium-sized construction industry business ($15 million to $20 million annual revenue), the adoption of a strict receivables funnel had a profound effect on their A/R. This company decided to adopt the receivables funnel concept, and to send notices and liens on every project when required by their policy. The results of their decision to implement a concrete payment funnel were phenomenal. After adoption of the payment funnel concept, the company’s uncollectable account percentage dropped below 1 percent, all the way to 0.035 percent (2010), 0.067 percent (2011), and 0.012 percent (2012). Further, and also significant, this company was able to increase business in “riskier” credit situations, and grow their bottom line. In fact, the strict adoption of the payment funnel concept fueled an increase in revenue by more than 140 percent in one year.

The effectiveness of the receivables funnel concept, and following through on the policy decision to send notice on every project, and to remain in a secured position is not limited in any way by company size. Small companies and Fortune 500 companies can all benefit by putting these concepts into use. An analysis of over 100,000

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invoices from a large construction industry participant reinforces this conclusion. That analysis found that the average Days Sales Outstanding for projects in an unsecured position was 71 days, while the average DSO for projects in a secured position was 33. Further, at 90 days after invoice,

February ASA Webinar Focuses on Mechanic’s Liens The Feb. 10, 2015, ASA webinar “Mechanic’s Liens: Protect and Collect” presented by Jerry Bailey, NCS, examines mechanic’s lien laws and how subcontractors can use them to protect themselves from losses and get paid sooner. Learn what tools are available to minimize your risk. This webinar is $99 for ASA members and $179 for nonmembers. Register online.

21 percent of the unsecured projects remained unpaid, while only 7 percent of the secured project invoices had not been paid by that point.

Creating and following a credit policy that incorporates a notice and lien rights receivable funnel can be the best decision your company has ever made to collect the money you are owed.

Scott Wolfe is CEO of zlien in New Orleans, La., a platform that reduces credit risk and default receivables for contractors and suppliers by giving them control over mechanic’s lien and bond claim compliance. Wolfe is a licensed attorney in six states with extensive experience in corporate credit management and collections law, including the use of mechanic’s liens, UCC filings and other security instruments to protect and manage receivables. He can be reached at (866) 720-5436, Ext. 700, scott@zlien.com, or @scottwolfejr on Twitter.

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Feature Green Is Good: Getting Paid and Ensuring Cash Remains King

by Gregg Schoppman

One thing that the recession provided as an indelible reminder was that cash is king. Always was, always will be. Managing cash flow became the ultimate “mile marker” as backlogs were lower, projects were cheaper and cash was just less prevalent. During the boom years, there always appears a regression to the bad habits. Receivables age like moldy cheese and contractors take solace in the fact that healthy backlogs will solve all of their ails.

Contractors for some reason forget how important it is to get paid.

Whether it is the fact that many contractors evolve from technical backgrounds — building construction, engineering or the trades — or simply because they are not wired to think like a businessperson, generating positive cash flow is imperative.

“But wait, it isn’t our fault. It is the no-good, stinking end-user/general contractor/prime contractor/etc.”

This is a reasonable counterpoint

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and one that does bare merit.

However, it also assumes that every customer never intends on paying their contractor. Realistically, there is a portion of the population that will never pay their bills. No process in the world will combat the unethical and downright nasty customers of the world. However, there is also a greater proportion of customers that intend to pay but probably have a good or at least reasonable explanation — lack of documentation, poor internal processing, poor internal communication, etc. As shocking as this might sound, there are plenty of businesses that have weak accounting groups and simply need “better management” on the part of the vendor. Blindly submitting an invoice and forgetting about it until the 30th of the next month is hardly a strong best practice. Defining a firm’s procedures relative to cash flow is paramount regardless of the state of the economy.

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Don’t Be Embarrassed Go to a restaurant and see what happens at the end of your meal.

Assuming the meal was at least satisfactory, the wait staff will approach the customer at the end of the meal with a bill. When was the last time a restaurant patron stood up and indignantly tossed the bill at the waiter while screaming “Are you crazy?! You hand me a bill?! The outrage!” Additionally, it is equally farfetched that the patron would wait 30-45 days and hold a portion of the bill back to protect against unforeseen conditions, such as food poisoning or maybe high cholesterol.

Yet, every day, contractors play this game. In some cases, contractors are afraid to ask for their money. “If I ask them for my money (assuming the contract allows for it), they will get mad and not let me work for them again.” The lunacy of this statement is baffling. Assuming a contractor acts within their rights, has followed

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the contract documents and does the asking in a polite manner, why would someone resent an invoice?

The majority of these negative feelings comes from two sources.

First, it is awkward to ask someone for money. Secondly, and probably the more likely reason, asking for money assumes that every step in the process has been followed correctly.

For instance, has the contractor tried to invoice a change order that hasn’t been approved? Did the quantities get verified by the resident engineer or did the contractor try to side-step the process? Before the process is addressed, get over the hurdle of asking for compensation.

Have a Process There should be a process for everything within a firm, especially for something as important as getting paid. For some companies, there is a process for filling our timecards or doing an expense statement but because “every customer is different,” contractors leave getting paid to the discretion of the manager. Below is a brief summary of the steps a contractor should have as part of its process (for definition sake, the designation Day -5 represents the time somewhere around the 25th of the month): • Day –5: A pencil and paper copy of the invoice is proposed to the customer for review.

• Day –4: A hard copy of the invoice is provided with the applicable documents as dictated by the contract documents.

• Day –3: The invoice is handdelivered to the customer (where applicable).

• Day –2: A phone call is placed to the accounting department (by the project manager) of the customer to ensure the invoice was received.

• Day 15: A phone call is placed to the accounting department (by the project manager) to ensure the invoice is still in the system.

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• Day 28: A phone call is placed to

the accounting department (by the project manager) to ensure the invoice is slated to be paid (assumes payment on the 30th or end of the month).

• Day 30: A phone call is placed to the accounting department (by the project manager) to provide a routing number or transportation vehicle (courier) to the customer for distribution.

First, it is important to note that not all payment cycles are equal.

The important item to consider is the contract terms. How often does a contractor complain about payment only to examine the contract, subcontract or purchase order and realize payment terms are Net 60 or paid-when-paid? Ignorance of a contract that was signed by you or your management team is not an acceptable rationalization to pound on a customer for being a weak payer.

Secondly, the subsequent phone calls are not meant to be harassing calls resembling that of a strong-armed “debt collector.” Simply put, these calls are friendly calls that hopefully get a contractor’s invoice to the top of the pile and also ensure that the i’s are dotted and t’s are crossed.

Often, a contractor learns of a missing waiver or undocumented change order at Day 28. Stem this off and be proactive.

Lastly, it should be noted that the project manager is making the calls in the aforementioned process.

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So many contractors view this as “accounting’s job.” Generating the invoice might be accounting’s job but following up and ensuring timely payment is the role of the manager.

Who knows the job better than the project manager? Relegating collections to the accountants is a surefire way to delay payment and lose something in translation.

Metrics and Escalation What is the firm’s mod rate? Most contractors can rattle off this number with ease. What is the firm’s DSO (days sales outstanding)? Now that is a tricky question. First, it is imperative that everyone understands how well the firm is at

IN THIS ARTICLE . . . �

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Establish a process — a policy — for getting paid.

Following up on invoices and ensuring timely payment is the role of the project manager.

Consider creative terms that will allow quicker and more expeditious payment.

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collecting its money. Safety is a very of the invoice? Additionally, what visceral image and easy to put in sort of discount could be offered the forefront. However, collections if bi-monthly invoicing (and quick are another metric that should be payment) were provided? There are elevated. Firms that provide regular no limits to the options available. feedback to the management team So often contractors succumb to the on collections are more likely to be paradigms of old because “that’s the proactive collectors. For instance, way we’ve always done it,” or “that review the collections and outstanding invoices Terms: 30-day 60-day during a weekly or Desired operating profit 16,590 16,590 monthly operations meeting. There is Total cost of money (2,716) (9,186) something to be said for Effective operating profit 13,875 7,404 peer pressure.

Needed operating profit 19,306 25,776 Additionally, there are plenty of clients that Needed operative profit margin 2.90% 3.83% need a gentle prod. If Needed sale price 666,319 672,790 the project manager has followed the system and Needed gross profit margin 9.80% 10.67% the contract documents, Needed direct cost markup 10.86% 11.94% determine an effective escalation strategy.

Table 1: Profitability and the Cost of Money When will the operations manager make a call?

The CFO? The president? will confuse our accounting group,” Obviously, this strategy should or “our customer will NEVER go not be employed lightly. However, for that.” Maybe these are all viable your $50,000 invoice may be small reasons, but examine your own potatoes to that multi-billion dollar accounts payable. How many of those a year owner/general contractor. invoices have “different” payment Creating a sense of awareness terms? Accounting figured out how amongst a firm’s customer base is to pay your bills quicker — now if important. The only way to do that only you can get them to get your is to demonstrate how important company paid quicker! cash flow is to your firm. Letting invoices ride week after week only Lastly, be selective. Customers that demonstrate a lack of importance are historically weak or no-payers or concern and further reinforce a should be examined regularly. Is customer’s unwillingness to pay it more costly to continue to work promptly. for a customer simply when you examine the cost of money? Most Be Creative and Be Selective contractors do not have a line item in their estimates called “Interest Carry.”

Do the work, write the invoice, However, as accounts receivables collect the invoice. If only the age, there is a cost associated with process was this simple. Yet, firms financing. For instance, Table 1 continue to operate under this (above) illustrates the cost of money same business cycle year after and its effect on profitability through year. Change the game — consider 30-, 60-, and 90- day terms: creative terms that will allow quicker and more expeditious payment.

As firms constantly examine their For instance, during the estimating competitiveness and balance an phase, what if an alternate was effective profit margin, it would be provided for discounting assuming reckless to discount the effect of the payment was made within 15 days time value of money. Compound

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this over 10, 15 or 20 projects within a firm and the cost can be staggering. Understand the cost of certain customers and make rational business decisions. Does this customer warrant a higher price because they are notoriously bad payers or should we make the ultimate business decision and not do business 90-day with them at all? Firing a 16,590 customer is never a fun moment but if a contractor (15,656) does not take cash flow 934 seriously, bad customers never will. Working for 32,246 free or at some discount 4.75% does not seem like a prudent business decision.

679,260 Cash is king and the true 11.52% leaders in the construction 13.02% business are those that understand cash flow and make it a priority in all of their processes. Getting paid is not an accounting function but an essential business practice whose burden must be shared by everyone within the firm.

Green is the lifeblood of any business and ultimately keeps firms out of the red.

As a principal with FMI, Tampa, Fla., Schoppman specializes in the areas of productivity and project management. He also leads FMI’s project management consulting practice. Schoppman will present four education modules at SUBExcel 2015 in Seattle. Prior to joining FMI, Schoppman served as a senior project manager for a general contracting firm in central Florida. He has completed complex and sophisticated construction projects in the medical, pharmaceutical, office, heavy civil, industrial, manufacturing, and multifamily markets. He has also worked as a construction manager and managed direct labor. Furthermore, Schoppman has expertise in numerous contract delivery methods as well as knowledge of many geographical markets. He can be reached at (813) 636-1259 or gschoppman@ fminet.com.

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Feature What Subcontractor’s Need to Know About ‘Pay-When-Paid’ and ‘Pay-If-Paid’ Clauses

by Eric Travers, Esq.

Getting paid. It’s important.

Subcontractors must pay their employees weekly and their suppliers monthly. They must also pay their gas, electricity, home office lease (or mortgage) and most all other bills on a monthly basis. A subcontractor who misses those payments will soon lose its access to labor, equipment, materials, and even its place of business. Despite this, subcontractors are often asked to finance projects by agreeing to a contingent payment clause.

Contingent payment clauses take several forms, and the form of the clause can greatly affect the risk you are accepting. That, in turn, can be the difference between getting paid and getting hosed. Depending on the applicable state law and how the clauses are worded, the enforceability of these clauses may be virtually certain, may be limited and may be challenged. As a result, it is crucial that subcontractors identify the risk associated with “pay-if-paid” clauses, so you can either avoid those risks,

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mitigate them through negotiations, or price them appropriately. That being so, here are some things you need to know about conditional payment clauses.

Background Contingent payment clauses in a construction subcontract are typically structured to provide that the subcontractor’s customer (the “general contractor”) need not pay for the subcontractor’s work until the owner has paid the general contractor first. There are two types of contingent payment clauses: • Pay-when-paid.

• Pay-if-paid.

As a general rule, courts in the United States have traditionally interpreted “pay-when-paid” provisions as an unconditional promise to pay the subcontractor for its work. The difference between a “pay upon receipt,” “net 30” or other unconditional payment clause and the pay-when-paid provision is, however, that a pay-when-paid clause gives the

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contractor time to delay paying its sub until either (a) it has been paid by the owner for the sub’s work; or (b) a reasonable period of time has passed and the general contractor still has not been paid. In other words, if the subcontract contains a “pay-whenpaid” clause, the net effect in most states is that the clause has created a timing mechanism, not a condition precedent, to the duty to pay, and your customer still must pay you within a “reasonable period of time” if the triggering event (its customer’s/ the owner’s payment) does not occur.

A “pay-if-paid” provision in a subcontract is much harsher. A pay-ifpaid clause will seek to shift the risk of non-payment by the owner onto the subcontractor by triggering the contractor’s obligation to pay only if it receives payment from the project owner. By using a pay-if-paid clause then, the contractor can insulate itself from any liability to the subcontractor if the owner does not pay. Probably the most common phrase in a payif-paid clause attempts to state that payment by the owner to the general

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contractor is a “condition precedent” to the subcontractor’s right to be paid and/or the prime contractor’s duty to pay its subcontractor. If you have agreed to a pay-if-paid payment provision, even if your work has been completed and accepted with no issues, you may have no right to be paid until the owner pays.

Practical pointer — Watch out for words like “condition precedent,” “assumes the risk,” “only if” or “to the extent” paid by the owner. Those words in a payment provision should tip you off that the contractor is trying to create a pay-if-paid clause.

Judicial Abolition of Pay-If-Paid Several states do not enforce “pay-if-paid” provisions because they are against public policy. But even though such provisions are usually disfavored even in states that enforce them, the majority of states generally will enforce a pay-if-paid clause if the contract unambiguously expresses the parties’ intention to shift the owner’s credit risk to the subcontractor. ASA members have access to ASA’s Contingent Payment Clauses in the 50 States (2014 Edition), which is a great resource for subcontractors on both (a) ASA member attorneys in the various states (if needed to pursue or defend claims); and (b) information on the enforceability of such clauses at least as of the publication date of the review.

It is clear that the law is evolving but that serious risks remain to the unwary subcontractor.

The highest courts of both California and New York have held that “pay-if-paid” clauses cannot be enforced — ASA appeared as amicus curiae in both cases. The rationale for both decisions was found in the mechanic’s lien laws of each state.

Both courts found that enforcement of pay-if-paid clauses would frustrate the enforcement of mechanic’s liens

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because those liens can never arise absent a right to be paid for labor and materials. In light of the public policy favoring enforcement of mechanic’s liens, the courts found that pay-ifpaid clauses can never be enforced in those states.

Legislative Responses Legislatures in states like Illinois, North Carolina, South Carolina, and Wisconsin have abolished contingent payment clauses in construction clauses altogether, according to ASA Contingent Payment Clauses in the 50 States (2014 Edition). Other state legislatures have carved out some exceptions to enforcement that allow for subcontractors to perfect mechanic’s liens even if they otherwise signed a pay-if-paid clause.

See Indiana Stat. § 32-8-3-18, Utah Code Ann. § 13-8-4(3)(a), Mo. Rev. Stat. § 431.183; Md. Code Ann., Real Prop. § 9-113 (a pay-if-paid clause does not waive a subcontractor’s right to mechanic’s lien or payment bond claims).

Finally, other states have prompt payment statutes that may not explicitly mention contingent payment clauses, but imply that pay-if-paid clauses are abolished.

Ultimately, action by each of these state’s highest courts may be necessary to clarify the meaning of these laws. See 73 P.S. § 504 (2012) (“Performance by a contractor or a subcontractor in accordance with the provisions of a contract shall entitle the contractor or subcontractor to payment from the party with whom the contractor or subcontractor has contracted”); Az. Stat. §§ 32-1129-01.P (2012)(the right to prompt payment cannot be waived by contract), 321129-02.A (2012) (“performance by a contractor, subcontractor or material supplier … [under its contract] entitles the … subcontractor or material supplier to payment from the party with whom the contractor,

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subcontractor or material supplier contracts”).

The Evolution of Trade Association Forms Until recently, AGC and ASA have had difficulty finding common ground on contingent payment language and a mutually acceptable subcontract form. However, ASA and AGC (and many other trade association groups) have more recently agreed upon the ConsensusDocs 750 form which is a pay-when-paid subcontract.

The widely used AIA A401 form Subcontract Agreed has also never included a “pay-if-paid” clause.

So both of the most widely used model subcontracts — the AIA A401 and ConsensusDocs 750 — contain no “pay-if-paid” provisions and AGC has explicitly endorsed the ConsensusDocs 750.

Reducing the Risk of a Pay-IfPaid Clause Once you know the risks, you can evaluate how best to reduce them, price it, or accept it. If you have determined that a pay-if-paid clause is at or near the top of the list of “killer contract clauses” for you, the next challenge is how to respond and manage the risk. Here are four things you should know about the major tools at your disposal:

Practical Pointer No. 1 — Use Conditional Bids.

One way to avoid this unpleasant experience of receiving an inequitable subcontract “after the fact” is for a subcontractor to condition its bid upon acceptable contract language.

An example of such a conditional bid might be: “This bid is conditioned upon the use of the ConsensusDocs 750 Subcontract.” A conditional bid is crucial for a subcontractor that may otherwise be bound to its bid (if the bid was relied upon by the contractor awarded the job), even if faced with

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unacceptable subcontract language later. A subcontractor that conditions its bid upon the “acceptable subcontract language” or a specific form like the ConsensusDocs 750 gives itself leverage by forcing the general contractor to decide “up front” whether to use it or not, based upon not only the price but also the contractual risk assumed in any contract. And if the contractor ignores the condition and tries to cram an unacceptable clause down onto the subcontractor, by using conditional bid language the subcontractor has given itself a tool to resist a “deal killer” subcontract term.

Some subcontractors even specifically describe in their bid proposals the types of provisions (i.e. “pay-if-paid”) that they will never agree to in a subcontract to increase their leverage when subcontract negotiations begin.

Practical Pointer No. 2 — Use a Contract Addenda.

In the members-only area of the ASA Web site, www.asaonline.com, ASA provides some invaluable tools, including commentary on the various trade (AIA, etc.) subcontract forms, that educated subcontractors can use to “redline” offensive provisions from proposed subcontracts. ASA also has draft addenda, including a generic Subcontract Addendum that you may want to refer to and consider using to defuse the typical proprietary subcontract form. While the addendum is not perfect for all situations, it addresses most of the offensive provisions typically encountered. The ConsensusDocs 750 is available at www.consensusdocs. org. ASA is a founding member of the ConsensusDocs coalition, which publishes a library of 100plus contracts and documents. ASA members can use the promotional

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Contingent Payment Clauses in the 50 States “Pay-if-paid” contract clauses can cause big problems for unpaid construction subcontractors and suppliers. Such clauses specify that a subcontractor or material supplier will not be paid for the work it performed or the supplies or services it provided “if” the general contractor doesn’t receive payment from the project owner. Pay-if-paid is not enforceable in all circumstances, however, and the Foundation of ASA’s 2014 Edition of “Contingent Payment Clauses in the 50 States” helps subcontractors and suppliers understand their risk. “Contingent Payment Clauses in the 50 States” is a no-cost benefit for ASA members and is available in the members-only section of the ASA Web site.

code ASA100 to receive a special member discount off ConsensusDocs subscriptions.

Practical Pointer No. 3 — Educate Your Customer!

Contractors want subcontractors that not only offer a low price, but also read and strictly follow all the details in the plans and specifications.

Yet, many contractors also seem to strangely desire a subcontractor that is unknowledgeable about the details and risks in their subcontract!

If pressed on items, or told they are the “only ones” objecting to certain language in the subcontract, subcontractors should explain that they pay detailed attention to the contract documents involving their work, including not only the plans and specs but the subcontract form.

Let your customer know upfront what subcontract terms are acceptable to your company and be prepared to explain why certain language is onesided and unfair.

Practical Pointer No. 4 — Walk Away from Unfair Subcontracts (Principal Costs!)

be prepared to “walk away” absent an equitable agreement. A million dollar contract you miss out on can be disappointing. But a million dollar contract you win but don’t get paid for can be devastating. Only when you are willing to walk away from a job will you be empowered to secure fair language.

If you take the time to educate your employees and customers on the unfair risk shifting in most form subcontracts and retain the courage and leverage to walk away from one-sided language, you will be best able to “level the playing field,” and increase the chances you will receive a contract you can live with.

Eric Travers, Esq., is a director with Kegler, Brown, Hill & Ritter, Columbus, Ohio, practicing primarily in the firm’s Construction Law area, representing subcontractors, general contractors, owners, suppliers, architects, sureties, construction managers, and others. Kegler, Brown, Hill & Ritter, serves as legal counsel for ASA. Travers can be reached at (614) 462-5473 or etravers@ keglerbrown.com.

Particularly in slow economic times it is always hard to lose out on a contract when you have spent time getting the job and are working hard to cover your overhead. Yet, nobody needs to work for free or take on a problem project. You must

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Legally Speaking Contingent Payment Clauses: Enforceable? Negotiable?

Worth the Risk?

by Matthew Meaker As the name implies, “contingent payment” clauses make payment to a subcontractor contingent on some event. Typically, such clauses take one of two forms: “pay-when-paid” and “pay-if-paid”: • A pay-when-paid clause links the timing of a subcontractor’s payment to when the owner pays the general contractor.

• A pay-if-paid clause dictates that a subcontractor will get paid only if the owner pays the general contractor.

Although contingent payment clauses are not included in standard subcontract forms produced by either AIA or ConsensusDocs, they do appear in many of the non-standard subcontracts and in modified AIA and ConsensusDocs that subcontractors are asked to sign. If these sorts of provisions are not included in the two most frequently used and accepted standardized forms in the construction industry, why has almost every subcontractor seen such a clause in a subcontract presented to them?

It’s about mitigating risk. In drafting a contract, risks are generally allocated to the parties that are in the best position to manage them. In examining the risk of an owner failing to make a payment, the general contractor — not the subcontractor — is in the best position to evaluate and mitigate that risk. The general contractor can contractually require the owner to provide financial information to demonstrate the owner’s ability to finance and pay for the construction.

While there may be other reasons for their inclusion, contingent payment clauses in subcontracts

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reflect a further effort by a general contractor to mitigate its risk — in this instance, of claims from a subcontractor — in the event of nonpayment by the owner.

Enforceable?

The existence of a contractual provision does not make it enforceable. Considering the frequency with which they are found, are contingent payment clauses enforceable within subcontracts? A good lawyerly answer is, “It depends” — on the type of clause, and on the state in which the contract is being evaluated.

With regard to pay-when-paid clauses, for over 30 years courts in most states have ruled that payment cannot be indefinitely withheld from a subcontractor based on a pay-whenpaid provision. Instead, payment should be made to a subcontractor within a reasonable time after the satisfactory completion of the work.

As for pay-if-paid clauses, courts in many states — including Arizona — are willing to enforce them, but only if there is contractual language demonstrating the parties’ unequivocal intent that the subcontractor is to be paid only if the general contractor is paid.

Determining the parties’ “unequivocal intent” involves a standard that varies from state to state.

In a 1997 Arizona case, L. Harvey Concrete v. Argo Constr. & Supply Co., the Arizona Court of Appeals held the following clause to be clear enough to be enforceable against the subcontractor: “[S]ubcontractor agrees as a condition precedent to payment … that the owner shall have first paid

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the payment … to the contractor, and that payment for either progress payments or final payment is not due and owing to the subcontractor as provided for herein until the owner has made such payment to the contractor.”

Other states, including California and New York, have held that pay-ifpaid clauses are a violation of public policy and are therefore void.

A subcontractor curious as to whether these clauses are enforceable in a given state should refer to Contingent Payment Clauses in the 50 States (2014 Edition), an ASA publication that is accessible to members on the ASA Web site, www.asaonline.com. The manual provides a summary of the basic status of the law in each state and is a good resource, especially for subcontractors that work in more than one state.

Negotiable?

In the event that a contingent payment clause is included in a subcontract presented to a subcontractor, does the subcontractor have to accept it without question?

Of course not! Every business owner needs to decide what provisions they are going to negotiate and what they are going to live with.

In the event that a subcontractor is confronted with a contingent payment clause and wants to propose alternative language, ASA’s recommended language is the following: “Subcontractor does not accept the risk of Customer’s receipt of payments from any source, and in no event will payments to Subcontractor be based upon or subject to

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Customer’s receipt of payment for Subcontractor’s work.”

In a negotiation over the removal of a contingent payment clause, a subcontractor should consider making the following points: • The subcontractor’s credit risk is with the general contractor, not the owner.

• Such a clause results in the subcontractor financing the project. The subcontractor is a builder, not a banker.

• Contingent payment clauses are void in some states, and it is unclear whether the contingent payment clause in the subcontract presented to you would be enforceable in your state.

These points are among the items referenced in ASA’s Subcontractor’s Negotiating Tip Sheet available in the members only area of the ASA Web site, www.asaonline.com. The tip sheet provides some hypotheticals for a subcontractor to consider in preparing to negotiate with a general contractor over a contingent payment clause.

Worth the Risk?

During the recession, a number of subcontractors took on jobs that they would have turned down during better times. In so doing, they assumed considerable risks, sometimes to their detriment. While, even in the best of times, risk is inseparable from business ownership, managing risk is key to profitability.

The risk in taking on a project under a contingent payment clause is that, if the owner does not pay the general contractor, you are left with obligations to suppliers, and you must determine whether there is a breach due to non-payment, weigh the costs of taking legal action, and find new jobs for which you will get paid.

What should a subcontractor consider in evaluating the risk?

• Determine whether a contingent payment clause is enforceable under the controlling law.

• Evaluate the owner and consider conducting your own credit check of the owner to determine for yourself the likelihood of potential default.

New On-Demand Videos from FASA When it comes to managing your business, the Foundation of ASA is your partner in education. View and listen to FASA’s on-demand videos at an individual workstation or in a conference room for group training.

Your order includes access to the on-demand video any time, and as many times as you’d like!

This is just one of the on-demand videos available through the FASA Contractors’ Knowledge Depot to meet your business management training needs.

• Consider your relationship with

the general contractor. (Some subcontractors worry that pushing back on a contingent payment clause will sour a relationship that may have taken years to develop.)

• Consider whether you can bear the risk of not getting paid on all or a portion of the project.

There is no easy answer to the question of whether contingent payment clauses are worth the risk, but understanding the nature of the law and the factors that need to be weighed can help you make an informed decision.

Matt Meaker is a shareholder with Sacks Tierney P.A., practicing primarily in the firm’s construction law area. Meaker serves as legal counsel for ASA of Arizona, on the Executive Council of the Construction Law Section of the State Bar of Arizona, and on the Arizona Registrar of Contractors’ Industry Advisory Council. He can be reached at (480) 425-2627 or meaker@sackstierney. com.

Contractors’ Knowledge Network

“Where Are We Now?” (Item #8075)

Do you know how the results of the volatile 2014 federal and state elections will affect your business? Learn how the elections will impact your business — and what you can do about it — in the video-ondemand, “Where Are We Now?” (Item #8075). Presenter E. Colette Nelson, Chief Advocacy Officer, American Subcontractors Association, Alexandria, Va., answers such questions as: • Will Congress seriously consider corporate tax reform?

• What are the federal government and the states doing to address wage fraud?

• Is the state legislative trend to reduce retainage continuing?

• Is the government doing anything to limit reverse auctions?

• Can the states limit inequitable risk shifting?

• What is ASA doing to protect subcontractor payment remedies on public-private partnerships?

• What is the outlook for new OSHA rules during the next year?

• What other new federal regulations can subcontractors expect?

Price: Complimentary for ASA Members and Nonmembers

Order online at www.contractorsknowledgedept.com or call 1-888-374-3133

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ASA/FASA Calendar April 2015

15–17 — ASA Mini-Committee Week: Executive and Finance Committee and Rap Council Meetings - Jan 2015

1 — Webinar: Non-Negotiators’ Strategies for Negotiating Outstanding Results

27 — ASA Bay Area Chapter GC Expo & Economic Forecast

May 2015

February 2015 10 — Webinar: Mechanic’s Liens: Protect and Collect March 2015 26–29 — SUBExcel 2015 in Seattle, WA

12 — Webinar: Managing the Life Blood of Contracting - Cash Flow

Coming Up . . . in the February 2015 Issue of ASA’s

THE

January 2015

June 2015 9 — Webinar: Bidding from the Other Side: How GCs Use GradeBeam to Find Subcontractors

Theme: Improving Productivity • Creating an Organization

Focused on Achieving Operational Excellence

Contact information for all ASA and FASA events/programs: www.asaonline.com education@asa-hq.com

• Managing the

Prequalification Process

• Improving Prefabricatoin

and Field Productivity with Design Standardization

Win. Win.

• Satisfaction Surveys: Are

Your Employees Happy?

THE

• Legally Speaking: What Is

QQ

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a Construction Attorney Good For?

Sell your products and services. Advertising reaches industry leaders and decision-makers who spend $11+ billion annually on products and services.

Support ASA. Advertising supports ASA, the industry voice of trade contractors.

Look for your issue in February.

Past Issues: Access online at www.contractors knowledgedepot.com

That’s a win-win situation.

To advertise in The Contractor’s Compass, contact Tony Kozak at (716) 844-8174 or advertising@asa-hq.com

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