March 1, 2019
Managing construction debt collection
Part II: As construction progresses
By Robert Kennaley
In our last column we discussed ways contractors, subcontractors and suppliers might address debt collection, to better protect themselves if accounts become overdue, during the pre-construction, bidding and negotiation phases of a contract. We will now discuss the steps contractors, subcontractors and suppliers can take to address debt collection issues during the life of the project, as construction progresses. If you are a subcontractor or supplier, we would recommend that, in the industrial, commercial or institutional contexts, you make inquiries to determine if a labour and material payment bond has been posted by the contractor in relation to the project. If a bond has been posted, you should obtain a copy, so you understand any time limitations imposed on a claim under the bond and so that, in the event that you have not been paid, you will have the particulars for giving your notice right at hand. While the owner and contractor will generally be cooperative in providing you with a copy of the bond, most lien legislation allows you to require them to deliver a copy, upon request, from the moment you commence your supply of services or materials.
We also recommend that contractors and subcontractors have their contracts and subcontracts at hand during the life of a project and that they consider either highlighting or summarizing the various notice requirements under those documents. In the event of non-payment or a dispute, you will have at hand the particulars of the form of any notice required, along with how it should be provided and when it must be received. In this way you can hope to avoid an argument over whether or not you failed to meet a key notice provision under the contract. Also, to the extent subcontractors are bound by the provisions of the Prime Contract (between the owner and contractor), a copy of that contract (with highlights or summaries) might also be set aside.
It is also important you understand what role, if any, the owner’s consultant will play on the project. This, again, will generally be spelled out in the Prime Contract. These provisions will determine the extent to which (and how) the Consultant will approve shop drawings, change orders and payment certificates. They will also spell out the extent to which the Consultant will be involved in inspections, deficiency correction and dispute resolution. In each case, having a clear understanding of who is to do what at hand will help you follow contract provisions, and remove any ‘excuse’ your client might have for not paying you.
Another good piece of advice for subcontractors and suppliers is to simply pay attention to what is happening on a job — beyond our own work. In many cases, there are warning signs something has gone wrong. Delay in a project is one example. In many circumstances, of course, delays will not be an issue and everyone will be paid. In other cases, however, delays will result in a cash crunch and, ultimately, claims. So, what can we look for?
If a project is significantly behind schedule, subcontractors and suppliers might ask around (at trade meetings or the coffee truck) to see if they can find out why. If the delay is attributable to the contractor or its forces, there might be a problem. If it is arguably the owner’s fault, you might find out if the contractor has made a claim for additional compensation and, if so, whether or not that claim has been approved or settled. An unresolved delay claim is a sign that, all too often, the contractor’s costs will escalate, creating a cash crunch. On the other hand, where the contractor is arguably at fault, the owner may assess backcharges against him, which can only exacerbate the situation.
Suppliers and subcontractors should also be concerned if one or more trades do not appear to have enough manpower on site. Where many trades are under-manned, it may be that no-one is getting paid on time. Where one trade is under-manned, this trade might be the cause of significant delay. It is a particularly bad sign if it is the person who owes you the money who is under-manned and potentially delaying the job.
What do you do when we see, or hear, that problems are developing on a site? We should remember that by continuing to provide services or materials when we have not been paid, we are becoming a creditor of the person who owes us the money. When problems develop on site, we should be less willing to advance such “credit” than we otherwise might be. You should review your contract to assess the extent to which you have a right to ‘drop tools’ because of non-payment. If the contract is silent on the issue, you will generally have the right to do so (at common law). However, it is important that you be able to prove that you are actually owed a somewhat-substantial sum, because the other side may have a substantial claim for damages if you wrongfully suspend work or terminate your contract.
The person who owes you money on a job will often, of course, promise that the money is coming and ask you to keep working. In considering this option, most lien legislation will allow you to make a formal request of persons further up the contract ladder, to determine the status of accounts and assess whether or not funds are actually going to be released down the chain. You might also ask that the person who owes us the money provide a direction that you be paid first, and directly, by the person above him in the ladder. Thus, in our example, the contactor could provide the owner with an irrevocable direction that the owner pay you the monies it owes to the contractor, until you are paid in full. You should remember, however, that the direction will only help us if the owner agrees that it owes monies. You should also ensure that the owner will honour the direction before you agree to keep working on that basis.
Finally, during the life of the project, you might also consider utilizing the written notice of lien to put pressure on those above you in the pyramid to get us paid. The written notice of lien option is available in most jurisdictions and can have the effect of an actual lien in many circumstances. In our next column, we will address collection issues when our work is done.
Robert Kennaley practices construction law in Toronto and Simcoe, Ont. He speaks and writes on construction law issues and can be reached for comment at 416-700-4142 or at rjk@kennaley.ca. This material is for information purposes and is not intended to provide legal advice. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.