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Reduce risk of claims by subcontractors

By Marcus Eyth
Dolan Media Newswires

Portland, Ore. – “Where did all the money go?” Lately, this question has been on the minds of many building owners who pay general contractors expecting those contractors will use the money to pay their subcontractors and suppliers for work done on projects.

Given these trying economic times, it appears some overextended and cash-strapped general contractors may be using money received for current project work to pay off subcontractors for work on previous or concurrent projects. As a result, unpaid subcontractors turn to lien laws that protect them from nonpayment.

How can an owner ensure that the money it pays the general contractor will reach the appropriate subcontractor? It can’t. But there are steps an owner can take to reduce the risk of exposure to claims filed by subcontractors on projects. A little due diligence, some awareness and a well-drafted prime contract addressing the following issues go a long way toward achieving that goal.

1. Know the subcontractors. Keep track of the trade contractors who should receive money from the general contractor by including a provision requiring the general contractor to either identify any desired subcontractor or seek the owner’s approval of any proposed subcontract.

2. Notice of claims, offsets and indemnification. Include a provision requiring the general contractor to notify the owner of any claims made. Early notice of claims is crucial for the owner to protect itself by, among other things, withholding payment to the general contractor.

3. Lien waivers. Require the general contractor and subcontractors to execute broad lien waivers as part of the payment application process. Properly drafted lien waivers constitute persuasive evidence for courts considering the dismissal of lien claims.

4. Direct payment to subcontractors. Reserve the right to make payments directly to subcontractors. This is effective because liens are discharged to the extent the debt has been paid.

5. Payment bonds. Require the general contractor to procure a payment bond, whereby a surety is charged with handling lien and other claims that are unpaid by the general contractor. While the payment bond does not automatically discharge a lien, it indemnifies the owner against claims in the event of a default by the general contractor.

Most experienced construction lawyers will acknowledge that there is no such thing as a foolproof construction contract for any project. However, owners will be best positioned to limit their exposure to lien and other claims if they: first, have a favorable contract that they understand and enforce; and second, stay actively involved in the project on a day-to-day basis to recognize and address payment issues as soon as they surface.

Marcus Eyth is a construction law and government contracts attorney in the Portland office of Davis Wright Tremaine LLP.

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