Late claims for payment by
a subcontractor's suppliers present one of the more aggravating contract administration
problems in public construction today. The general contractor who has not protected itself
and its bond against this risk may face the unpleasant prospect of paying twice for the
goods at issue. Even in the best-managed jobs, a subcontractor's supplier can often slip
in with a claim just before the ninety-day deadline expires for making claims against
Miller Act-type bonds.
In many of these
cases, the general contractor may question whether the supplier's goods actually reached
the project on which the bond claim is asserted. Much to its dismay, however, the general
contractor will usually find that denying receipt of the disputed materials on the job
site does not defeat the supplier's claim.
Since the supplier is quite often unable to verify with complete certainty that its
materials reached the jobsite, the courts have been somewhat liberal in allowing the
supplier's claim against the general contractor's payment bond. The supplier will not be
required to prove actual delivery or use of its materials in the project. Rather,
it need only show that it had a reasonable, good faith belief that its goods were used on
the bonded job.
Even when the general contractor has some solid evidence that the disputed materials have
been diverted by the subcontractor to another project altogether, that will not usually be
enough to defeat the supplier's claim. For the supplier in this scenario, ignorance is
bliss -- or at least, payment in full.
How then, does the general contractor avoid this unpleasant pinch and "oil the
squeaky wheel"? Several procedures can be used, either singly or in combination, to
limit the risk of supplier claims against a payment bond. While each of these procedures
imposes its own cost on the project -- whether that cost is an increase in a sub's bid or
just an increase in time and paperwork -- they can often reduce substantially the much
greater risk and cost of a supplier's claim. My personal favorites include the following:
Avoid
using subcontractors who have not completed a similar project for you in the past, or ones
whose bids seem unreasonably low; experience has shown that these situations often carry a
greater than expected risk of loss. Lack of a
satisfactory track record or a bid which seems too good to be true are automatically red
flags for me. In most of the payment bond cases I have seen, the unhappy general
contractor usually makes at least one of the following statements during the course of the
litigation:
"This was the first (and
last) job that subcontractor has ever done for me."
"I knew that
subcontractor's bid looked too low when I accepted it."
"I had problems with
this subcontractor on the last job, too."
For those general contractors who find themselves in these "red flag"
situations, I highly recommend using the other "tools" described below.
Require
performance and payment bonds from subcontractors on key portions of the project, or ones
which pose a special risk. While payment
bonds add to direct costs and can impact the competitiveness of the general contractor's
bid, the benefits of this additional protection can be substantial. First, a subcontractor
who can get a bond from a reputable surety probably has a well-run operation and can be
counted on to pay its suppliers. Second, the bond's protection may justify the general
contractor easing up on retention requirements and allowing other concessions which can be
factored back in to a more competitive bid from that subcontractor.
Require
a complete list of the subcontractor's suppliers at the beginning of the project and
independently verify the subcontractor's expected purchases for the project.
By tracking its subcontractor's suppliers, the general contractor can monitor payment
histories, and arrange joint checks when appropriate. Furthermore, if a subcontractor's
key suppliers have been notified in advance (preferably in writing) of the expected scope
of that subcontractor's purchases and the expected duration of the bonded project, they
may be more diligent in collecting payment from the subcontractor.
Joint
check agreements are still the cheapest form of protection against suppliers' claims.
If the general contractor has not required a bond from its subcontractor, controlling the
application of its payments is the next best defense. If the supplier fails to retain
enough of each progress payment to cover its receivable, it will be barred from bringing a
claim against the general contractor or its payment bond. Likewise, if the general
contractor sets a dollar limit on its obligation under the joint check agreement, and
sticks to that limit, the supplier will have clear notice of the expected scope of
purchases for that project.
Conditional lien waivers and releases should be required from the supplier before progress
payments are released. The general contractor
can foreclose any possibility of a supplier's claim by using a lien waiver and release
form which verifies that the supplier, upon receiving a specified payment, releases any and all claims for labor or materials supplied through the
date of the payment.
If
a supplier makes a bond claim, get professional advice immediately in evaluating that
claim and formulating a proper response. Even though courts interpret the
bond statutes liberally to benefit the suppliers who claim under those bonds, strict
compliance with legal notice requirements is still enforced. For example, the performance
of warranty work or minor punch list items will not extend the time for giving notice of a
bond claim. Also, some bond statutes require notice of the claim by registered mail;
others do not.
There are also many subtle differences between the various state and federal payment bond
statutes and the language of the bond forms themselves that can be discerned and used by
an experienced construction lawyer. A prompt consultation with legal counsel may often
reveal some technical defect in the claim which would allow the general contractor and its
surety to avoid the liability altogether.
Pressure can also be brought to bear on the delinquent subcontractor, its surety, or
retention funds to offset or reduce the supplier's claim. Subcontractors and suppliers
should also note that many of the strategies discussed in this article will also fulfill their
desired goal of obtaining payment for valuable labor and materials used in the project. Oiling the "squeaky wheel" does not have to be a process in
which one party benefits at the expense of the other.
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