What prudent businessperson would not like to be paid in advance for work? The cost of performance, which is fundamentally the cost of capital, is shifted to the customer. Construction contractors have a long history of attempting to “front load” their contract pricing into the early phases of a project, effectively recouping performance costs before those costs are incurred.
For project owners, the dangers of front-loaded pricing are apparent. It can result in a loss of contractor incentive for expeditious project completion and weaken a contractor in the latter stages of performance. In the event of a default, the owner is financially exposed. Performance bonds are reassuring, but provide an incomplete form of protection.
Many public project owners have taken regulatory steps, in the form of standard contract clauses, to discourage front-loaded pricing. The federal government has a clause that allows unsubstantiated project mobilization costs to be paid only upon contract completion. Does this allow the government to lock in a low price by knowingly accepting a front-loaded bid and then unilaterally restructuring the pricing to defer payment of misallocated performance costs? A federal appeals board recently grappled with this question.
The other case in this issue involved an attorney’s ability to represent multiple claimants vying for the same pool of project ownership money. The need for independent representation outweighed the practicalities of such an arrangement.