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Careful negotiation of construction contracts will reveal payment challenges facing each party in the construction chain. Following are six of these challenges, along with the corresponding risks and benefits contractors and subcontractors must consider.

1. Pay-If-Paid Provisions
Pay-if-paid contract provisions are becoming more common and provide contractors with significant leverage over subcontractors and suppliers. In short, these clauses only obligate a contractor to pay its subcontractor in the event the owner pays the contractor for the work.

By doing so, the risk that the owner cannot or will not make payment to the contractor is shifted to the subcontractor. Many jurisdictions draw a distinction with pay-when-paid provisions, holding that these similar provisions only provide a contractor with a reasonable delay in making payment. Some jurisdictions do not allow a contractor to rely on these provisions if the contractor was the cause of the payment delay.

Because these provisions significantly alter the parties’ relationships, they merit careful attention and legal review. 

2. Incorporation of the Prime Contract
Contractors with stringent or project-specific requirements may pass these obligations to the lower-tier subcontractors by incorporating prime contracts with the owners into the subcontracts. When drafted well, these subcontracts can clearly identify the scope of work and allow the contractor to redirect liability. If poorly drafted, the prime contract likely will conflict with the subcontract, miring the dispute in litigation and impeding progress on the project.

3. Work Directives Pending Disputes
Subcontractor and supplier disputes can frequently disrupt a project’s progress. Contractors that frequently work on public projects will recognize work directive provisions that allow an owner to require a contractor to perform pending resolution of a contentious dispute. Contractors also can gain significant leverage—and the ability to maintain a project schedule by including these provisions in subcontracts—because they may preclude a subcontractor from terminating a contract and suing for breach during the project.

All parties should carefully weigh the practical risks and benefits on each project before agreeing to these provisions.

4. Time Limits on Claims
Contractors can keep a project on track by strictly requiring notice of claims promptly upon discovery.  Contractual provisions that waive claims that are not identified within a short period after discovery (usually three to 21 days) enable the parties to promptly resolve disputes. They also can have the secondary effect of subjecting subcontractors to waiver of claims not immediately identified and raised in writing. Accordingly, subcontractors must be extremely diligent about reporting any claims during a project.

5. Prospective Mechanic’s Lien Waivers
Some jurisdictions allow subcontractors to contractually waive their statutory lien rights before they perform work. These waivers give owners or contractors tremendous leverage because they preclude a subcontractor from disrupting the work or obtaining payment from the owner or property through a lien filing. However, drafters must carefully review governing law to determine whether these provisions are enforceable.

6. Judicial Release of Mechanic’s Liens
Even when liens are filed mid-stream in a project, contractors may avail themselves of the statutory provisions that enable them to replace the lien with a bond. With the higher number of mechanic’s liens during the past decade, many insurance brokers have become familiar with mechanic’s lien bonds and can provide them at a low rate. A construction litigation attorney who is familiar with the mechanics of “bonding-off” mechanic’s lien can assist with ameliorating the potentially significant effects of a lien that is delaying progress payment from the owner.

The specific laws of the jurisdiction governing the project will heavily influence the availability of each of these contractual remedies. Accordingly, initial review by an experienced practitioner in the jurisdiction is highly recommended. 

Nathaniel L. Story is an attorney at Hirschler Fleischer, Richmond, Va. For more information, call (804) 771-9585 or email nstory@hf-law.com.

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