Scary Contract Terms 101: Paid if Paid

  Awhile back, I wrote a post explaining the Paid when Paid provisions that, unfortunately, are near ubiquitous to commercial

Awhile back, I wrote a post explaining the Paid when Paid provisions that, unfortunately, are near ubiquitous to commercial construction (Scary Contract Terms 101: Paid when Paid.)

As it turns out, however, Paid when Paid has an even scarier twin–the Paid if Paid clause.

This…is pretty much exactly what it sounds like.  If enforced, it means that if the owner doesn’t pay the general contractor, the general contractor doesn’t have to pay any subcontractors. Ever.

Yikes.

The good news is that unlike Paid when Paid, not all jurisdictions recognize Paid if Paid clauses.

Even in those that do, such clauses are typically construed pretty narrowly–after all, courts don’t like to see people go unpaid as a result of contractual agreements that they had no say in (in this case, the agreement between the owner and general contractor). As a result, generally if there is any ambiguity in the language, courts will choose to construe these clauses as Paid when Paid.

The bad news, however, is that because this is such a controversial provision, enforceability varies greatly from state to state.  If you’re working in a state like New York or California, you don’t have to worry about these clauses at all–no matter how they’re worded, they’re unenforceable!  In other states, GCs are given a pretty wide latitude in shifting the risk, and if the contract says “Paid if Paid”, there will be a whole slew of case law backing it up.

In other states yet, this clause creates a huge grey area due to conflicting case law, precise requirements for wording, and/or a complete lack of precedent.

As a result, there’s no way to give contractors easy answers on what to do when encountering Paid if Paid.

…………

If you do all of your work in the same state, it might be wise to do a little research on your particular state’s laws. A couple of hours and/or a few hundred dollars spent talking to a construction lawyer now will probably be well worth the investment, since this is an issue you may be encountering another 30 times over the next decade.

On the other hand,  if you’re like a lot of commercial contractors, you may be doing work in five or six different states at a time. In that scenario, ultimately, all you can do is run a risk-benefit analysis:  How much will it hurt if you don’t get paid?

For a quick $3k job with good margins, you might feel like jumping right in and taking the risk.  It’s a little scary, but at the end of the day, it’s an absorbable loss if anything goes wrong.  For a $1.5M job with good margins, you should take the time and money to research what that state’s laws are before proceeding. And, if we’re talking about a $200k job that already has a 2% profit margin? Just, no.

In fact, quit placing those bids all together.

National Work Like a Dog Day

  As has already been established (Useless Facts, More Useless Facts) I can really appreciate a useless fact. In that

As has already been established (Useless Facts, More Useless Facts) I can really appreciate a useless fact.

In that spirit, I would just like to announce that today is, in fact, National Work Like a Dog Day.

…..

Personally, I’m a little torn as what this means I’m supposed to do.

I mean, when someone says they’re ‘working like a dog’, what they really mean is that they’re working their butt off.  But as someone who has had several dogs over the decades, I can assure you, that work ethic left something to be desired.  If I worked like my dog today, there’s zero chance I’d still have a job tomorrow.

Then again, my dog gets to live in a nice big house, rent free. She also gets to spend her mornings laying out in the sun, eating food that somebody else paid for, and being told how adorable she is. I, on the other hand, am quite busy paying for that house she lives in and the Kibbles and Bits she takes for granted.

So…now that I think about it, maybe we should all take some lessons from our dogs.  Just don’t let the bosses catch on.

Today’s Useless Fact: Indoor Plumbing

  One strange thing about my job is that whatever is happening tends to realllllly be happening. I’ve had Dan

One strange thing about my job is that whatever is happening tends to realllllly be happening.

I’ve had Dan Days, where every person I talk to ends up being named Dan.  I’ve had Bob Days, which are like Dan Days, but with Bobs. I’ve had lien rights days, where I spend so much time dealing with weird lien issues that I feel like I should just go out and open a practice that specializes in nothing but liens.

And, I’ve had plumbing days.  Days where I find myself learning entirely more about the plumbing business than I ever set out to learn.

Recently, we had a plumbing day.

Midway through my zillionth hour of hearing about toilet storage issues and impossible engineering specs, I got to thinking:  Plumbing is nice.  Like, really nice.

And, around here, it’s actually a pretty new thing.

My grandparents, after all, grew up with outhouses.  And we were fancy folk.  The people who weren’t my grandparents?  It was going to be awhile before they got an indoor commode.

….

In other places, indoor plumbing has a little bit longer of a history.  One of the first buildings built with an indoor restroom was the Tremont Hotel in Boston.  Built in 1829, the four story luxury hotel featured no fewer than eight indoor bathrooms, all located on the ground floor.

By today’s standards, we expect nicer accommodations in places that rent by the hour, but for 1829, that sent shockwaves through the world.

Five years later, The Astor House in New York put the little ol’ Tremont to shame–this six story hotel featured 17 bathrooms…and not just on the first floor.  These 17 bathrooms served 300 guest rooms; a bathroom to guest ratio that was quite luxurious for the time.

……..

As for bringing indoor plumbing to the masses, there is no single year that a person can pinpoint–like any luxury, bathrooms in the house had a bit of a trickle down effect, making their way from something that only the rich people in the cities could enjoy, to a nice extra that the middle class could obtain (i.e. the stainless steel and granite of 1918), to something that we all take for granted.

One time span that does pretty well encapsulate the spread is 1929-1954.  During this period, sales for plumbing distributors increased by 367%.  It was during this period that having an indoor toilet went from something that you treated yourself to for making Junior Executive VP at the bank to a thing that even people in the slums started expecting. It was also during this time indoor plumbing spread through countryside, bringing those newfangled urban luxuries to those who lived well outside the city limits of St. Louis or Memphis, much less New York or Boston.

So, the next time that you’re dealing with A Plumbing Day, just be glad it’s no longer 1928.

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Scary Contract Terms 101: Paid When Paid

Every day, I read over contracts. That’s…just one of those things you do when you’re a lawyer in the construction

Every day, I read over contracts.

That’s…just one of those things you do when you’re a lawyer in the construction industry.  That and send emails.  It’s like, the world’s lamest reward for paying attention in college.

Suffice to say, at this point, I have read over more contracts than the average person will in a lifetime.

I’ve seen big contracts, small contracts, contracts that cover every possible contingency, contracts that have been copy-and-pasted from other irrelevant contracts, contracts that leave out literally all of the vital information, contracts that look like they might have been written by a first grader, contracts that actually were written by a first grader, contracts that devote 60 pages to OSHA contingency plans for volcanic activity in Nebraska, and contracts that actually make sense.  (The latter being the rarest of all contract varieties.)

One contract term that comes up pretty regularly, and sends a chill down the spine of every seasoned lender, is ‘Paid-When-Paid’.

Paid-When-Paid is exactly what the name implies:  It means that until the owner on a project releases payment to the GC, the GC doesn’t have to pay any subs or suppliers.

Ouch.

Unfortunately, this clause can be found in most standard AIA contracts, and if you do much commercial construction, you’ll eventually bump into it.

As to what this means for you, the subcontractor, I’ve got good news and bad news: The good news is, eventually, the GC has to pay you.  The bad news is, that payment may take some time.

Unlike Paid-When-Paid’s ugly stepsister, Paid-When-Paid does nothing to shift the risk of eventual payment.  If the project owner skips town without paying the GC a dime, the GC is still going to be legally liable for paying suppliers and subcontractors.

The risk that this clause does shift, however, is that of slow payment.

If the GC’s contract with the owner says that the first draw for the project will be paid in July, and July comes and goes without a check from the owner, the GC has no obligation to pay any of the people who’ve already provided labor and materials on the job.  The same applies if August and September pass by, equally devoid of payment.

Eventually, the courts will tell the GC they have to pay up, but depending on what your jurisdiction considers a ‘reasonable’ amount of time, payment for that work may not come for many months after the work has been completed.  From a cash flow perspective, this is devastating to subcontractors–after all, by this time, you’ve likely sunk tens of thousands of dollars into supplies and labor, and yet you have nothing coming into pay those bills.

And, on top of that, you’ve essentially gone six months without a paycheck.

Unfortunately, there is no easy way around this clause–it’s endemic to the industry, and if you take on many projects, you’re going to encounter it from time to time.  The best thing that you can do is be aware of the dangers:  Look for this clause before entering into a contract.  Think about who the project owner is.  Take the risk into account when setting your bid price. Watch your cash flow so that you have a cushion in the event of slow payment. Keep an eye on lien rights. And, if worse comes to worse, don’t be afraid to talk to somebody who knows what they’re doing on this stuff.  As far as scary contract clauses go, this risk is easier to mitigate that some, but doing so requires planning ahead and being aware of the dangers to your cash flow.

A Penny Saved

Around the office, I am a Jack…er, Jill, of many trades.  Going over AIA contracts.  Preserving lien rights on projects. 

Around the office, I am a Jack…er, Jill, of many trades.  Going over AIA contracts.  Preserving lien rights on projects.  Studying the enforceability of ‘Paid when Paid’ in states that I’ve never even been to.  Keeping clients happy.  Trying to fix our toilet that sometimes sounds like a dolphin. You name it, I’ve probably found myself doing it a time or two.

One thing that I find myself doing far more of than I ever intended is serving as a bit of a pro bono financial advisor.

Now, as somebody who has no idea how much is in my bank account right now, this could not be more of an ironic task:  I do not have a business degree.  I did not intern at Goldman Sachs.  I did buy a velvet cape at the thrift store last month, because it looked cool, and it was only $8, and I have questionable taste regarding “cool”.

So, in other words, I’m probably the wrong person to turn to for financial advice.

Then again, I’m also the wrong person to turn to for toilet repair advice (see I Should Have Been a Plumber) but I did a pretty great job of freeing Flipper from the ol’ commode.  And, in that spirit, I would like to share the piece of advice that I spend so. much. time. going over with clients:

Don’t buy stupid stuff.

Err…don’t buy too much stupid stuff.

That velvet cape?  Probably pretty stupid. But also, $8.

………………………

Particularly if you’re working construction, things will go wrong.  They always go wrong.  That’s why the last building project that came in under budget and ahead of schedule was completed by a team of brontosauruses…and even then, it was a real shock to the dinosaur community.

If you are taking on a new construction job, please leave yourself some cushion.

I know the numbers on the contract are huge.  I know the projected profit margins look great.  I know that your old work truck makes some funny noises and kind of smells like feet. I know that the King Range F250 Super Duty looks awesome, and does not smell like feet.  My husband’s a contractor.  Trust me, I’m….way more familiar with the condition of aging work trucks than I want to be.

But dang it, for the sake of all that is good and right with this world (as well as for the sanity of everybody involved), DO NOT GO OUT AND BUY THAT TRUCK THAT COSTS MORE THAN THREE YEARS OF LAW SCHOOL.

At least, not right now.

Once that awesome $1.8M project is over, and it turns out that the profit margins really were 40%? By all means, it’s time to upgrade to something that doesn’t smell like a junior high locker room.  Until then, though, please remember that a penny saved is a penny earned…and that better yet, the penny ‘earned’ through another year of dealing with stinky trucks is a much easier penny to come by than the one involving August heat, a cranky project manager, and a 78 page subcontract.

Good Luck Out There…

  In all seriousness, we hope that you have a lovely weekend!  It may be the 13th, but it’s also

In all seriousness, we hope that you have a lovely weekend!  It may be the 13th, but it’s also Friday, and it’s hard to beat a Friday!

Today’s Useless Fact: The History of Hard Hats

  Anybody who has had the misfortune of knowing me for long knows that I am wonderful repository of useless

Anybody who has had the misfortune of knowing me for long knows that I am wonderful repository of useless knowledge.

I may not be able to remember what I wore yesterday, or how to use an Excel sheet, but darn if I can’t tell you everything you ever wanted to know about the history of public housing or different types of flamingos.

It’s a gift.

Just…not a good one.

In that vain, however, I would like to share today’s useless tidbit: The history of hard hats.

If you’ve ever felt your hair drench with sweat on a 50 degree day (or had a few brain cells spared after your idiot co-worker dropped an empty paint bucket), you’re probably pretty familiar with the ol’ fashion accessory.

But, did you know that the first hard hat was invented by E.W. Bullard in 1919?

E.W.’s dad had a hat making company, and after E.W. came back from WWI with his army-issued steel helmet, he found himself realizing the protective headwear might just have some uses outside of the battle field.

Made out of steamed canvas and glue, Bullard’s ‘Hard Boiled Hat’ went onto protect the noggins of many a construction worker.  So, if you currently have hair matted to your forehead (but brain cells to spare), you know who to thank!

Happy Fourth of July

Happy Birthday, America.  You’re looking pretty great for 242! In all seriousness, we hope that you have a safe and

Happy Birthday, America.  You’re looking pretty great for 242!

In all seriousness, we hope that you have a safe and lovely Fourth of July.

Lien Rights Explained, Part III

For the past couple of weeks, we’ve been going over the basics of liens, including what a mechanic’s lien is (Lien

For the past couple of weeks, we’ve been going over the basics of liens, including what a mechanic’s lien is (Lien Rights Explained, Part I) and the preliminary notices often required to preserve lien rights (Lien Rights Explained, Part II).

For the final part of this captivating trilogy, I want to go over the information that you need in order to actually file said lien.

First of all, in order to file a lien, you need to have the project information.

Who actually owns the property?  Where is the property located?  When did you last provide labor or materials on the job?  These are all things you will need to know in order to file a valid lien.

Sounds easy enough, right?

Yeah, about that…

First of all, you have to make sure you have the right owner.  This sounds obvious, but corporate ownership can be complicated:  You might think “Well, this project is a Big Burger Barn, so the owner is Big Burger Barn”, but often, Big Burger Barn actually has a whole slew of corporate subsidiaries, and the real owner is ‘BBB Land Development, LLC’.  Merely sending everything to Big Burger Barn may leave you with an invalid lien.

Similarly, identifying the property is a two part process:  There is the street address that you see listed on Google (i.e. 123 Big Burger Barn Road), but there’s also the legal address.  In order to get the legal address, you will most likely to have to go talk to the county clerk.

Also, you know that street address I just mentioned?  It…may not exist yet if this is new construction.

I know.

What can I say?  If this stuff were fun and easy, there wouldn’t be lawyers who do nothing but this all day.

Because of these potential challenges, there are two things that I want to stress:  (1) Get as much project information as you can at the beginning of the job.  Before you set one work boot on the ground, figure out who actually owns the property.  Keep track of when you started the work, and when you finished.  Have a paper trail.  This way, should payment complications arise, you aren’t going to be stuck trying to figure out if you started work on the 15th or the 19th, and whether the property is really owned by Big Burger Barn, BBB Land Development, or Chester’s Chutney that just happens to be leasing to a Big Burger Barn.  (2) Don’t wait until the last second to start preparing your lien.  You will discover that there’s some information you didn’t collect. You will find out that the property has no street address.  You will realize that the paperwork is more confusing than you’d anticipated. You will have 70 other things going on that week, and zero free time to spend on trying to find your answers.  As such, if the deadline for filing your lien is October 10, don’t wait until October 8 to start on everything.

Seriously.

Don’t.

Lien Rights Explained, Part II

  Last week, we briefly discussed what lien rights are, and why they matter. (Lien Rights Explained, Part I) As

Last week, we briefly discussed what lien rights are, and why they matter. (Lien Rights Explained, Part I)

As GI Joe (should) have said, though:  “Knowing is only half the battle”.

After all, as previously mentioned, a lien doesn’t just magically appear the minute that the owner or GC decides not to pay.  Instead, you have to jump through a few hoops to ensure that those lien rights are preserved, and a few more to actually file the lien.

Unfortunately for us all, lien rights vary from state to state.  What works in Texas probably won’t work in Georgia (and vice versa).  There are, however, a few common documents required at some point by most states.

So, for this week’s edition of What You Need To Know About Lien Rights, I’m going to briefly go over some of the things you may need to send in order to preserve your lien rights.

•  Notice to Owner–typically, this document is sent at the very beginning of the job, well before any payment issues have come up.  The purpose of the Notice to Owner is exactly what the name would imply–it tells the owner that you are providing labor or materials on the job.  If you’re a subcontractor, that in and of itself is a huge step towards ensuring prompt payment, since the owner may otherwise know nothing about you.  By sending this notice, the owner knows you’re on the job, knows you’re going to expect payment, and knows to make sure the GC releases payment to you when appropriate.

Not every state requires that you send a Notice to Owner, but regardless, it’s not a bad idea.  After all, preventing a payment snafu from happening in the first place will be infinitely less stressful then trying to pursue a lien after you’ve gone two months without payment.

•  Notice of Intent to Lien–this comes up later…it’s what you send to the owner and GC, letting them know that payment is overdue, and if you don’t get paid soon, you’re going to proceed with a lien.

Lien deadlines vary greatly by state, but regardless, the Notice of Intent to Lien is something you need to watch out for.

In almost every state, the notice must be sent before filing the lien…and sending this does nothing to pause the clock that’s ticking on your lien.  So, if your state requires that a lien be filed within 60 days of last providing work on a job, but the Notice of Intent to Lien has to be sent 10 days before that, what it really means is that you have 50 days (instead of 60) to get the ball rolling.

…………………..

Next week, I’ll conclude this series by going over the basics of how you file a lien itself.

Until then, though, make sure you keep an eye on your preliminary notices.  Or, if you’d like, feel free to hand all of that off on our back office support.  Services we provide for subcontractors

We deal with lien rights every day, and we’re experienced at making sure every client gets paid every time.  While you certainly can handle lien matters on your own, our back office is always happy to help keep things running smoothly, so that you can focus on your real job.