ConstructionPro Week, Volume: 1 - Issue: 16 - 08/20/2012

Do Subcontractors Have Adequate Payment Protection?

By Bruce Jervis

If one is not at the top of the payment chain, things can be precarious. A prime contractor receives payment directly from the project owner. Subcontractors are dependent on the prime to pass those project funds through as compensation for the subs’ contributions to the project. Prime contractors are not always quick to do so.

Two recent cases illustrate the payment vulnerability of subcontractors. In the first case, the prime contractor filed for bankruptcy, leaving its subcontractor unpaid. The sub argued the debt was not dischargeable in bankruptcy because the prime contractor held the project funds in trust for its subcontractors and suppliers. The subcontractor lost that argument. While the prime contractor had contractual and statutory duties to pay its subs, the prime did not hold the project funds in trust. The prime could discharge the payment obligation in bankruptcy.

The second case addressed the enforceability of the waiver of a subcontractor’s public works payment bond rights. The subcontract said that if the sub failed to furnish a payment bond in the subcontract amount, the sub waived any claim against the payment bond furnished by the prime contractor in accordance with the public works statute. This waiver was ruled a violation of public policy and unenforceable.

Do you think subcontractors have adequate payment protection? Some contend that mechanic’s lien rights and payment bond rights are sufficient; if a sub fails to secure payment, it is the sub’s own fault. But it is not always that straightforward. What do you think? I welcome your comments.

COMMENTS

Absolutely not. In business since 1993, I finally had cause to file a mechanic's lien on a property, coincidentally, just down the street from your office. Filing and perfecting a lien is an expensive minefield. The winner is usually the one that has and holds the most money, which is almost never the subcontractor.
Posted by: Todd Schneider / Schneider Contracting Corporation - Friday, August 24, 2012 6:34 PM

The payment rights for subcontractors are definitely not sufficiently protected. I was in a situation recently were the primecontractor submitted invoices and was paid for our work and just kept the money. This was a clear violation of the primecontract agreement between him and the owner. The owner was unwilling to force the primecontractor to live up to his contract. A year and a half later I got 1/3rd of my money.
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