NOW THAT'S a headline to catch your attention! Other than contracting the plague, or paying a lawyer, I can't think of anything a contractor hates more than the prospect of paying its subs' and suppliers' bills, particularly when the bills are not for his job or are more than the set contract amount. It is, unfortunately, not totally avoidable, but there are some things alert contractors can do to lower the odds of it happening to them.
Prevailing wages. The U.S. government, and many other public owners, can't force contractors to hire union workers, but they can require contractors to pay at a minimum the "prevailing" wage rates for the area and trade. For federal jobs, this is covered by the Davis-Bacon Act (40 U.S.C. 276a et seq.), and for states it could be called a "little Davis-Bacon" or something else.
The law is generally enforced by requiring every contractor at every tier to fill out "certified payrolls" that show who was employed, what he did and how much he was paid. If the government can show that the appropriate wages weren't paid, it can hold any and all upper-tier contractors liable.
Of late, we have seen some aggressive wage-and-hour auditors go beyond auditing the certified payrolls — going out in the field to observe what workers are doing, questioning them whether they were ever doing skilled work, etc. If they can get evidence that the worker was doing any work of a higher classification, then they put the burden on the contractors to disprove that they shouldn't have to pay more.
We also are seeing contracts that contain double penalties for prevailing wage violations — liquidated damages to the owner, on top of double penalties paid to the worker or state.
The best way to avoid this potential liability, obviously, is by only doing business with subcontractors who have deep pockets and can take care of their own problems — easier said than done.
To protect yourself factually, you will need to keep detailed records. Even if the government doesn't require it, keep daily records (and require subs to keep daily records) that show what each worker was doing throughout the day. No law says that you can't hire one person to do laborer's work half a day and lay pipe the other half, but there will be an assumption that the person is entitled to the higher rate of pay for the whole day if you don't have records to show that he was not.
Keep daily records that show what each worker was doing throughout the day.
Garnishments. As contractors, you are already familiar with laws that allow garnishments of wages for child support, unpaid judgments, etc., of employees. Less common, but even more of a headache, are garnishments by judgment creditors of people you have bought things from, your subs and suppliers. If someone to whom one of them owes money finds out that the deadbeat (which is what he is by now) did work for you and claims that you owe him money, that creditor can come after you to pay the money directly to the creditor.
If you don't dispute the debt, you probably don't care to whom you pay the money as long as you pay it to the right person ( which might mean paying it into a court and letting others fight it out, but that's the topic of another column).
But what if you think you have offsets because the goods arrived late or were defective? What if you get a lien claim from a supplier to the sub who worked for you?
Generally, you are only obligated to pay the bottom-line net amount due to the firm with which you did business. To protect yourself, however, it is a good practice to make sure your contracts and purchase orders have language in them expressly stating that you are not obligated to pay anything unless and until:
- All work is properly performed or conforming goods received on time;
- All bills of the sub or supplier have been paid; and
- You have lien waivers from everyone who could make a claim against you — to make sure that the funds don't become the sub or supplier's property until you are sure you are out of harm's way.
Additionally, all defective work and delays and costs to you should be documented because, even if the sub or supplier isn't around to contest them, that judgment creditor will put you to the test to prove them.
The too-low-to-be-true bid.
I doubt that I am telling you anything you don't already know when I say that a bid that looks too good to be true generally is. It is one thing for a particular sub or supplier to give better pricing to customers who are loyal to him and who pay on time. But when a price comes in that is so much lower than other prices, or is from someone you've never heard of and for whom you can't get references, you have to know that you are going out on a limb.
You can lower the risk of dealing with this firm through diligence. Require lien waivers from everyone or issue joint checks. Get to know any employees he has on the job and verify any payroll information you get to satisfy yourself that the right wages are being paid. Intervene if you see signs of financial difficulty, such as material shortages, smaller crews or contacts from creditors.
No one can avoid all credit problems of firms with which you do business, particularly in a slow construction economy, but with a little extra work you can manage your financial risk and be around to prosper when times are good.
Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., tel. 816/421-4800, e- mail to [email protected].