Dan Pope, Senior Vice President, Old Republic Surety, offers key considerations for preventing payment-guarantee gaps, in his blog “Mind the Gap: Start Early to Guarantee Payment to Subcontractors” on the website of the Construction Financial Management Association.
There are numerous reasons why construction payments could get delayed across the various tiers of a construction project. Regardless, the financial consequences can be crippling for general contractors (GCs) and subs. According to LevelSet, a company that facilitates construction payment processes, over $1 trillion flows through the construction industry each year, yet 20% of all construction companies report cash flow as a constant problem. Liquidity problems not only hinder a GC’s ability to pay vital subcontractors, vendors and other business partners (which can escalate tensions and further delay construction progress), they also hamstring long-term planning and company stability.
Most publicly funded projects have allocated budgets already in place before construction begins, so there’s less financial exposure for the GC. In privately owned projects, however, the GC and subcontractors may have to rely on mechanics lien rights for payment guaranty – a drawn-out legal process, according to Dan Pope, Senior Vice President of Underwriting at Old Republic Surety, in an in-depth blog on guaranteeing payment to subcontractors.
To prevent payment-guarantee gaps, both GCs and subcontractors need to be sure their contracts are written and executed to provide appropriate payment guarantees. As an example, it’s important for the GC to define and verify contract expectations with subcontractors (and their subs and suppliers) who may be one or more times removed from the direct owner/GC payment process. In addition, both GC and subcontractor need to understand the implications of different contract elements, such as subcontracts that include pay-when-paid and/or pay-if-paid clauses. Surety bond producers and underwriters can play an enormously valuable role in the process of reviewing these contracts for appropriate protections.
Savings clauses, naming additional obligees on all bonds, hold harmless agreements – these are just some of the nuanced elements in guaranteeing construction project payments. Check out Dan Pope’s full blog for interesting real-world examples as well as solid suggestions for eliminating payment-guarantee gaps in your next construction contracts. Read more here.