My previous column dealt, generally, with the problems many contractors experience with getting paid. Within the framework of 800 to 1,000 words, it is difficult to thoroughly analyze all the facets of that most pressing issue. We can examine motivations, strategies, responses, legal remedies and so forth, but that examination is, by necessity, cursory at best. Bringing an actual case study into the discussion might be a better way to illustrate the points mentioned in last month's column.
The cautionary tale
The following narration is an actual case. The names are fictitious; ABC Plumbing Company does work for A Particular General Contractor for many years. Both parties have mutually established their bona fides and work well together. The subcontractor performs consistently and well, the GC pays as advertised with no nit picking. Even change orders are handled expediently.
The GC gets a job with an owner who has designs on piecing together a rather large project in phases due to a shortage or ready cash. The project is negotiated by the GC and the plumbing contractor. All pricing and scopes of work for each phase are agreed upon by all parties. ABC Plumbing pre-liens the project and all goes well for awhile.
As the first phase of the project nears completion, the owner begins to make changes in the specifications and scope of work. The GC passes these changes on to his subcontractors, who dutifully price them and wait to be issued change orders. The owner insists that the changes be done, but does not issue change orders to the GC.
The GC, pressured by the owner for performance, finally issues change orders for the work to his subcontractors based upon promises of the owner that the change orders are forthcoming. He does this for several reasons; his subcontractors' refusal to do the work without change orders, his eagerness to keep the project rolling and the owners’ promises that he will get those change orders out right away.
This situation continues for several months, with the GC issuing change orders to subcontractors who do the work and bill for it. The GC, being a man of his word, continues to pay the subcontract change orders without funding from the owner. The owner issues a few token change orders to the GC, but the lion’s share of the change work is being paid for by the GC.
As the project continues to move forward, it doesn’t take the GC long to dry up his cash flow by paying for changes that he is not being reimbursed for, and eventually he must stop paying for those changes until the owner reimburses him. The owner, at this point, refuses to issue change orders for work that is already done and falsely claims that the work was part of the original contract. The GC and the owner get crossways and the whole thing comes to a halt. The subs are left holding the bag on work for which they have legitimate change orders, the GC has no money to pay, and the owner refuses to reimburse the GC.
The end game
At this junction everything comes apart. The GC, now forced into bankruptcy, cannot pay the subcontractors. The GC, subcontractors and suppliers must now foreclose their liens to force payment from the owner. The owner refuses to pay and blames everyone else for his folly. Once the liens have been perfected, the title to the property is muddied enough that the owner cannot get the financing he wanted. He tries several tactics to get the subcontractors (and the GC's) lien removed, including bonding around the liens, but the rules have been followed by most parties and he cannot clear the title enough to get funding ... stalemate.
So begins a two and one half year battle to recover money rightly owed. ABC Plumbing is owed about $17,000. Legal fees for more than 30 months amount to about $35,000. Finally, after several subcontractors’ band together and are about to succeed in winning title to the property in question, the owner's attorney offers a deal. After almost three years since performing the work, ABC Plumbing settles for $44,000.
Let's look at the result; by settling for $44,000, ABC Plumbing has come out with a net loss of $8,000 after attorney's fees. Add the loss of interest on the money over time and you've got a substantial loss, not to mention the wasted time and effort.
Remember my caveat last month about never suing unless it was a last resort? This story illustrates the futility of litigation. Even if you are totally in the right, as ABC Plumbing was in this case, and even if you do everything to protect yourself, the legal system is simply not designed to provide effective, timely relief. The adage "going to war doesn't prove who's right … only who's left" could easily have been written about the civil tort system.
In hindsight, ABC Plumbing felt that they might have fared better by leaving their lien in place and waiting for the owner to offer to settle, no matter how long that took, rather than enter into the protracted lawsuit. The moral is that contracting is a risky business and no amount of caution can protect you. There always exists the possibility that, one way or another, you might get burned.
The Brooklyn, N.Y.-born author is a retired third generation master plumber. He founded Sunflower Plumbing & Heating in Shirley, N.Y., in 1975 and A Professional Commercial Plumbing Inc. in Phoenix in 1980. He holds residential, commercial, industrial and solar plumbing licenses and is certified in welding, clean rooms, polypropylene gas fusion and medical gas piping. He can be reached at [email protected]ldriver.com.