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Tools of the trade: Protecting against subcontractor defaults

levy-steffesBy Joshua Levy of Whyte Hirschboeck Dudek SC
and Bailey Steffes of Tri-North Builders Inc.

The construction industry is experiencing a rise in business as a result of greater investment in facility improvements across the board, but the increase brings with it greater risk.

More work means more employees, subcontractors and suppliers to manage, more payments to track and more project sites to operate.

On top of that, many companies coming out of the recession are operating lean and may not have sufficient working capital to handle the increasing volume of work.

So even as business booms, companies continue to struggle, as evidenced by the recent bankruptcy filing from Virginia-based Truland Group Inc., one of the largest electrical contractors in the United States. And an event like that causes ripples that affect countless projects and companies.

When a key player on a project unexpectedly goes out of business or is having financial difficulty, the biggest concern for other stakeholders should be to preserve job costs and the overall budget. It is imperative that all money paid out gets disseminated to the lower tiers, otherwise problems will result, such as the filing of liens.

Liens are troublesome for the owner and can eventually result in payments getting delayed or stopped for all companies working on the project. Parties can be forced to pay twice for materials or services if their subcontractors do not satisfy their obligations. Those issues then can escalate into breach of contract actions, unhappy clients and hefty litigation costs.

At a crucial time of industry expansion and recovery, construction companies need to employ best practices to prevent payment problems from spiraling into legal issues. For a general contractor, this could entail collecting sworn statements from subcontractors and closely tracking activities and deliveries at the project sites.

A sworn statement is a document prepared and sworn to by subcontractors on the project and submitted with each payment request. The statement identifies all lower-tier subcontractors and suppliers used by the subcontractor, their contract amounts and the amounts previously paid to those companies. These documents help a general contractor track which companies are on a project and what is owed to them. This also allows the general contractor to keep track of all the lien or bond claim waivers it needs to collect.

Tracking who is on the jobsites is also a great way to ensure payment for all labor and materials. The onsite superintendent is in the best position to keep such documentation. The superintendent should use his or her daily log to track all deliveries to a site and all the subcontractors that are working onsite on each given day. This information should then be communicated back to the project manager and the accounting staff.

When used in conjunction with the sworn statement, this daily log is a great tool to ensure that the subcontractors are providing accurate sworn statements. If inconsistencies are noted, they should be immediately brought to the attention of the subcontractor so that problems do not escalate.

For those on the other side, subcontractors and suppliers, the best action to protect themselves is to provide a notice of furnishing to both the owner and the general contractor. This one-page document is sent to an owner and general contractor informing them that the company has provided or will be providing labor, materials or services to their project.

Many states require these in order to preserve lien rights. While Wisconsin does not require such notice for commercial projects, it may still be a helpful practice to implement. That one-page document is often all a company needs to make sure all parties know who is working on the project and to ensure payment.

Some payment bonds have specific preliminary notice requirements. In all cases, the preliminary notice should be phrased as informational only, so it is not misinterpreted as a forecast of payment concerns.

And like general contractors, subcontractors and suppliers, should identify the parties involved in running and working on the project. The best time to assemble information needed to preserve lien and bond rights is at the beginning, after all, before any problems arise.

The industry looks poised to continue rebounding this year, and taking precautions such as these can help ensure that construction companies and suppliers at all levels are reaping the rewards.

Know who is working on the projects, know who is responsible for making payments and know if payments are being timely made. Let this knowledge be your safety net in times of feast and famine.

Josh Levy is a shareholder at Whyte Hirschboeck Dudek SC and a co-leader of the firm’s Construction Services Team. Bailey Steffes is a second-year student at the University of Wisconsin Law School and legal intern at Tri-North Builders Inc.

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