Take a page from workplace safety to improve construction payment
Thursday, September 08, 2016
While safety on construction sites has dramatically improved over the last several decades, no such strides have been made in construction payment. The payment chain features a cover-your-(butt) mentality that has given rise to liability-shifting payment devices such as pay-if-paid and pay-when-paid contracts.
Where is the love? If the industry can rally around emphasizing safety on construction sites for the good of everybody, why can't the industry rally around fair payment for the good of everybody?
Why is payment different?
It shouldn't be.
Unlike payment regulations, the construction industry was forced to accept greater safety measures. Members of the construction industry are all too familiar with OSHA, and while the organization can create headaches, its very existence has fueled advances in safety nationwide. With accountability required top to bottom throughout the industry, members at different levels have come together to prioritize workplace safety.
No such group effort has taken place when it comes to payment. In fact, it has been quite the opposite. Unlike with safety measures, regulation on construction payment can vary greatly from state to state. Federal legislation on the subject, such as the Miller Act, only addresses specific issues. As a result, industry members have been left to themselves to solve the issue.
Unsurprisingly, this has led to parties at the top of the payment chain merely pushing liability down the chain. Payment systems in the construction industry are currently designed to pass along liability like a game of hot potato, and the subcontractors and suppliers at the end of the payment chain are the ones who get burned.
Without regulations forcing change, strengthening the relationship between parties up and down the chain is the best way to create change. And those relationships must be built on trust.
Lower-tiered parties would blame a lack of trust
Subcontractor mistrust stems from the fact that construction payment works largely on credit. These parties first perform work and provide materials, then must wait for money to trickle down the payment chain. This creates a system of slow payment at best and nonpayment at worst.
Because the higher-tiered parties are the ones holding payment, they have the leverage to force liability-shifting provisions into subcontracts. These often come in the form of pay-if-paid and pay-when-paid contracts.
Under these contracts, a party cannot be held liable unless they have been paid by the tier above them. When the party responsible for paying lower tiers has so little faith that payment will come, there is an issue with how payments are being made.
As issues arise with parties higher in the chain, the problems have a greater impact on those at the bottom. With fewer resources than the parties above, these subcontractors can quickly find themselves in a bind.
When this happens, the best remedy for a lower tiered party is often to file a mechanics lien. These liens strike fear in the heart of property owners, just as they are designed to.
Higher-tiered parties would also blame a lack of trust
Top-tiered parties have their own reasons to protect themselves. The threat of having to make payment twice can frighten property owners. As a result, owners can be slow to release payment.
When contractors do get paid, making sure the money finds its way into the proper hands can be tricky business. When a large number of parties are involved in a project, it becomes harder to make sure everyone has been paid. When one of the lower-tiered parties goes unpaid, mechanics liens and construction bond claims come into play, and owners' fears of paying twice for the same project are realized.
What's the solution?
Taking a cue from every romantic comedy I've ever seen, the solution to all of this mistrust is communication. Bringing everyone to the table at the beginning of a project through improved communication would establish a level of transparency not currently present in the construction industry.
Notices provided by every subcontractor and supplier would inform prime contractors and property owners of everyone involved in a project. By knowing the full roster on the project, property owners would no longer fear liens popping up from seemingly nowhere.
Owners would also be able to identify all subcontractors and suppliers and attach lien waivers to payments made to the prime contractor. This would hold prime contractors accountable for sending payment down the chain and prevent lower-tiered parties from filing liens on work that's already been paid for.
Utilizing lien waivers more effectively would also help solve this problem. As mentioned above, property owners use lien waivers to protect their title. But lower-tiered parties can use waivers to their advantage, too.
By issuing lien waivers conditioned on payment, these parties can speed up the payment process while also building trust with owners and prime contractors. Having subs and suppliers waive their rights may sound like a tough sell, but as long as conditional waivers are used, lien rights are not altered until payment is made.
When an owner can verify which parties are due payment (through notices) and know that lien rights of those parties will be waived upon receipt of payment, there will be much less reason to slow down or withhold payment.
If industry actors won't accept safety hazards as the status quo, they shouldn't accept payment issues as such either. The construction industry is constantly embracing new safety techniques and improved technology, but hasn't taken the time to fix internal issues that plague it.
By better utilizing two devices industry members are already familiar with, construction payment can become a safer, more transparent process. As with all other relationships, communication is the cornerstone of improving payment problems between owners, contractors, subs and suppliers.
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