private work: how to secure a fair contract + get paid

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THE PROBLEM -

TOO LITTLE WORK FOR TOO MANY CONTRACTORS CREATES DESPERATE CONDITIONS RIPE FOR:

1. Bid Shopping

2. Killer Contract Clauses

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THE CONTRACT IS THE BIBLE

that establishes RISK –

and RISK must be managed and pricedappropriately.

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PRIVATE WORK V. PUBLIC WORK

Private Work – Can Present or Negotiate a Fair Contract

Public Work – Bid Must Be Responsive and Cannot Change Contract

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WOULD A CONTRACTOR PRICE RISK THE SAME IF -

+ No differing site condition clause?

+ No extensions for weather delays?

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WOULD A SUBCONTRACTOR OR SUPPLIER PRICE RISK THE SAME IF -

+ No lien rights?

+ No bond rights?

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CONDITION YOUR BID

1. Suppliers – Control Risk by Purchase Order

2. Subcontractors – Condition Your Bid.

“This bid is conditioned upon the use of the ConsensusDOCS 750 or other subcontract form acceptable to Subcontractor.”

3. Contractors – Provide contract in advance and say “bid this.”

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CONTRACTORS HAVE A FRIEND IN:

Fairness in Construction Contracting Act –

R.C. § 4113.62

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WHAT TYPE OF CONTRACT PROVISIONS ARE UNENFORCEABLE?

+ No Damage for Delay Clauses

+ Waiver of Bond Rights

+ Subject to Foreign State Law

+ Forced to Arbitrate or Litigate Out of State

+ Final Payment as Waiver If Prior Notice

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FAIRNESS IN CONSTRUCTION CONTRACTING ACT PROVIDES:

Nothing in a contract or change order can waive responsibility for the –

“Owner’s acts or failure to act”

(and Contractor’s acts or failure to act if you are a sub)

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PAYMENT

THE LIFEBLOOD OF ANY SUBCONTRACTOR

WHO PAYS LABOR EVERY FRIDAY AND SUPPLIERS IN 30 DAYS.

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YET SUBS ARE ASKED TO TAKECREDIT RISKS

NOT ACCEPTED BY GCs AND SUPPLIERS.

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AND IF SUBS ARE NOT PAID

THERE IS OFTEN THE PRACTICAL EFFECT OF NOT PAYING SUPPLIERS!

So Suppliers Should Care About “Pay-if-Paid” too.

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TWO TYPES OF CONTINGENT PAYMENT

1. Pay-when-Paid

2. Pay-if-Paid

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PAY-IF-PAID

Shifts 1. Credit Risk of Owner

Non-Payment

2. Risk of Contractor (or other Sub)

Non-Performance

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PAY-WHEN-PAID

+ In most states, an implied duty to pay in a REASONABLE PERIOD OF TIME.

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THE KINDER-GENTLER PAYMENT TERM

+ Pay-When-Paid+ Paid within a reasonable period of time.+ General Contractor still obligated to pay even if Owner doesn’t make payment.

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WHAT WORDS SHOULD BE AVOIDED?

+ IF

+ CONDITION PRECEDENT

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HOW TO SPOT A PAY-IF-PAID CLAUSE?

Condition Precedent

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TO BE ENFORCEABLE A PAY-IF-PAID CLAUSE MUST

BE:+ Clear and unambiguous

−If not, construed against the drafter+Will render the term Pay-When-Paid

+ Why is that important?−It must be drafted correctly −If not, “benefit of the doubt” will go to the subcontractor

+Construed as the more favorable Pay-When-Paid

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WATCH OUT FOR PAY-IF-PAID IN CLAUSES GOVERNING:

1. Change Orders

2. Claims or Requests or Equitable Adjustment

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WHAT ABOUT LIEN OR BOND CLAIMS?

Generally cannot recover on payment bond or foreclosure lien (“no money yet due”).

Unless your state statute provides otherwise.

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SOME STATES PERMIT “PAY-IF-PAID” BUT STILL ALLOW LIEN RIGHTS TO BE

PRESERVED

+ Indiana

+ Ohio

+ Missouri

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TRANSTAR ELECTRIC

There is a case now pending in the Ohio Supreme Court that will determine if Pay-if-Paid remains enforceable in Ohio.

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LIEN RIGHTS ONPRIVATE COMMERCIAL

PROJECT

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STEP ONE: REQUEST A NOTICE OF

COMMENCEMENT−Provides information about an improvement−Filed with the county recorder where the improvement is located

+Not so for Public Projects−The recording of the Notice of Commencement triggers the obligation to provide a Notice of Furnishing

−Owner should record

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REQUEST FOR NOTICE OF COMMENCEMENT

Private Commercial Project

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NOTICE OF COMMENCEMENTPrivate Commercial Project

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WHO DO YOU REQUEST IT FROM?Private Commercial Project

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STEP TWO: SERVE A NOTICE OF FURNISHING

− Puts the Owner and Original Contractor on notice

− Send by Return Receipt (certified mail)

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NOTICE OF FURNISHINGPrivate Commercial Project

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WHO DO YOU SEND IT TO?

1. The Designee listed on the Notice of Commencement+ If no Designee, send it to the Owner as listed on

the Notice of Commencement

2. The Original Contractor

Send By Certified Mail

Obtain Return Receipt

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WHEN DO YOU DO ALL OF THIS?

+ Simple Answer+Right When You Start Work /Furnish Material

+ 21-Day Window

+ “Better late than never”

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21-DAY WINDOW

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PHASE 2 – PERFECT YOUR LIEN RIGHTS

+Rumors +You Have Payments Overdue

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MECHANIC’S LIEN AFFIDAVIT

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TIMING MATTERSPrivate Commercial Project

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OHIO PROMPT PAYMENT ACT

Provides that when the Contractor Receives Money from Owner

CONTRACTOR MUST PAY SUB OR SUPPLIER WITHIN TEN (10) CALENDAR DAYS.

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APPLIES TO SUBS TOO

AND SUB MUST PAY ITS SUB-SUBS AND SUPPLIERS WITHIN TEN (10) CALENDAR DAYS.

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WHAT IF PAYMENT NOT MADE TIMELY?

OFFENDING PARTY MUST PAY18% interest and attorney’s fees!

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CHANGE ORDERS

Why wait?

Big wait = Big Disappointment

NOTICE, NOTICE, NOTICE

“Early and Often”

In Writing

Price estimates before the work is done.

Signed time tickets help, but are not everything.

[Beware of “hidden” all encompassing release language in pay request, change orders and lien waivers.]

Benefits:+ Avoids legal pitfalls of late notice.+ Minimizes excuse that “if only we had known sooner …”+ Allows a problem to be solved before it grows.

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“WHY I CAN’T WAIT FOR A CHANGE ORDER”

Or

If I insisted on a change order for everything,nothing would get built.

ONCE WORK PERFORMED WITHOUT A WRITTEN CHANGE ORDER OR DIRECTIVE –

You are at risk and lose your leverage.

Use the contract language (must be in writing prior) against the customer … “will hold up the work!”

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COLLECTION STRATEGIES

To Wait is Wishful Thinking.

Solutions:

1. Collection letters.

2. Mechanic’ liens

3. Payment bond claims

Benefits:+Focus collection activities on the sources of the payment problem.

+Utilize your true leverage.

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IT’S ‘THE PRINCIPLE OF THE THING’

aka

PRINCIPLE COSTS!

MAKE A BUSINESS DECISION:

Attorneys fees are generally not recoverable so

compromise earlier rather than later. (95% of cases ultimately settle).

“A sign of a fair settlement is one in which both sides are equally displeased.”

You have got to give if you want to get.

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Thank You!

Don GregoryKegler Brown Hill + Ritterdgregory@keglerbrown.comkeglerbrown.com/gregory614-462-5416