In the News

March 12, 2020

 

Reading the fine print is one of the better-known clichés, but there’s a reason for it. Many sayings start from a small truth and grow to become world renown. Another famous saying, at least in the business-to-business credit world, is that construction creditors have a toolbox full of items they can use to better situate themselves to get paid. Combining the small print proverb and the creditor toolbox phrase lands those in the business at a crossroads known as lien waivers.

Lien waivers do just that to those who sign them—waive the right/ability of the potential lien claimant. While waivers are not exactly a tool for creditors, the fine print, or actual form, must be read and understood. Credit departments can’t only look at the title of the form and say, “OK,” because the language of the form might not be as clear. There are many risks for an unsecured creditor including default and complete losses. And like tennis, unforced errors can absolutely devastate a business even further.

Waivers can appear in contracts or purchase orders sent to credit departments, and in some states, this is an effective tool for owners and general contractors to make lower-tier parties become unsecured creditors through the entirety of the project. As material suppliers and those lower in the supply chain, “you have to know how to review contracts to eliminate that waiver,” said James Fullerton, Esq., of Fullerton & Knowles, P.C. in a recent NACM webinar on the topic. “More and more states have added wavier protections, making waivers in contracts signed before work begins ineffective because it is against public policy.”

This is why credit departments and material suppliers need to review contracts or purchase orders and cross out the waiver; however, separate waiver documents are effective in all 50 states. There’s no such thing as a standard waiver; they vary tremendously in how they are worded and how lien rights are affected. Some progress payment waivers go further than they should, noted Fullerton, waiving rights to retention and future shipments, etc. While there are no standard waivers, most written by title companies will have a blank for the dollar amount paid and for the date. “A lot of people will sign these,” said Fullerton, but potential lien claimants have to look deeper to find the red flags.

For progress payment waivers with blanks for the dollar amount and date, credit departments need to fill in the correct dollar amount and date as well as review for trigger words and phrases, such as “hereafter” or “today” rather than specifics such as a certain date to be paid through. Fill in the date correctly and add “except for funds held for retention and change orders.” However, this can still be disputed by general contractors and owners, but it’s a good start for material suppliers. Fullerton mentioned making all waivers conditional. This can be done by adding, “This release will be effective only to the total amount of payments actually received without any bankruptcy filing for 90 days thereafter.” This language fixes all the problems—only waiving rights to payments actually received and getting around bankruptcy preferences.

Objections from debtors is a huge battleground. Debtors are certainly entitled to progress payment waivers. Before payment, the payor needs a waiver from the payee (subcontractor) and all their sub-subcontractors and suppliers. It is reasonable for creditors to cross out “hereafter have” and add “except for retention” as well as crossing out “through today.” Another acceptable change is adding “except for change orders,” which is where the pushing and shoving will come from, said Fullerton.

 

 

The U.K. left the EU Jan. 31, but what the future holds for the country’s credit and economic risks still remains unknown. Taking three years and multiple prime ministers to decide on an exit elevated the risk of doing business in the region. But with the U.K. passing the Withdrawal Agreement bill, a “no-deal” Brexit will likely make the transition out of the EU smoother—but with some sticking points credit professionals should be aware of.

The majority of the risks stemming from the exit will not be immediate, according to a recent article by Fitch Ratings. Since the U.K. was expected to leave, the possibility of risk decreased. EU law will still apply to the U.K. until the end of 2020, which has the potential to make the transition smoother and set up an environment for negotiations.

“This really means the negotiations now start in earnest,” said NACM Economist Chris Kuehl, Ph.D. “The possibility that the U.K. would change its mind and remain in the EU is off the table. The sticky issues will now have to be dealt with.”

Present trade deals will continue through 2020, but credit professionals should be mindful of any changes that will occur into 2021. Kuehl said the British desire to work out a new trade deal with the EU, and given the U.K.’s strong impact on the global market, it may be in the EU’s interest to negotiate a free-trade agreement. According to a recent article in the BBC, the EU will likely push for a more-shallow trade agreement, something Kuehl said is expected after “three years of acrimony” between the U.K. and the EU.

Internal political tensions will also complicate extending credit in the U.K., as Scotland will likely feel more compelled to leave the EU; Northern Ireland’s relationship with Ireland will also be more complicated. In the midst of political tensions, credit professionals should be aware of the risks of doing business with these countries as circumstances are subject to change, possibly causing friction with international payments.

“One of the biggest issues will be internal,” Kuehl said. “Britain has deep divisions of its own; Brexit makes these more problematic. ... The Brexit decision has reignited the movement for Scottish independence. The Northern Ireland situation will be extremely complex as there will now be a hard border between the two Irelands—one that will cut homes, farms and villages in half.”

Credit professionals can minimize risk by keeping an eye on the latest updates in the U.K. Nothing drastic will likely change until 2021, but preparing for what comes after Brexit will make for more informed and safer credit decisions.

 

 

Experience in the construction industry can tell you a lot about what makes a good general contractor (GC). Qualities such as industry knowledge, project and time management, and delegation skills certainly boost a GC’s resume, but a professional of such high caliber can have their reputation tarnished with two words: slow payment.

There is a laundry list of reasons why GCs don’t pay their subcontractors (subs). Fortunately, subs working with slow payers have many tools at their disposal, which if properly executed, can help speed up the process to ensure material suppliers see payment as well.

Stand Up for Contract Terms

Sometimes, subs and material suppliers must navigate a “pay-when-paid” or “pay-if-paid” clause in a construction contract, both of which GCs may use as a means to delay payment, one Virginia attorney told NACM. Most of the relationships between owners and GCs fall under one of these two clauses, and in some cases, the GC is under no obligation to pay the sub unless or until they’ve been paid by the owner. However, whether the clause is enforceable varies from state to state.

“Then, when the GC pays the sub, a material supplier may say, ‘I don’t have a pay-if-paid clause in my paperwork; I’m just supposed to be paid 30 days on invoice,’” the attorney said. “But that isn’t the way it works. If anything, the sub doesn’t have the money to pay the material supplier unless or until they’ve been paid by the GC.”

Construction attorney Quinn Murphy told Construction Dive that before signing a contract, subs have the opportunity to negotiate payment timeframes—perhaps removing pay-when-paid or pay-if-paid clauses—as well as retention terms with the GC. Although it is industry standard that may allow up to 10% of a sub’s invoice amount to be withheld, Murphy explained, retainage is in place to make sure subs are doing their part. So, if they are, there isn’t as much of a need to withhold retainage.

“There's no reason why the general contractor shouldn't be required to pay you when you hit certain milestones like substantial completion,” Murphy said.

A Mechanic’s Lien Is a Friend

A mechanic’s lien provides a form of security for the payment of money owed to persons such as contractors, subs, workers and material suppliers who add value to a building that is under construction. Furthermore, the process prompts payment of creditors throughout the project and ensures that money intended to finance the construction is, in fact, used for that purpose.

Once again, lien laws vary around the country, Construction Dive states, but a mechanic’s lien often informs property owners of delayed payments, in turn, putting pressure on GCs to pay subs. In the article, Rutan & Tucker attorney Justine Kastan said a mechanic’s lien “gives [subs] a pretty tangible form of security for your claim.”

Nowadays, vendors on construction projects can usually go on a GC’s website, where all sorts of information is available. Material suppliers have to develop the skills to look at the contract and find the parts that concern what they’re supplying.

NACM’s Lien Navigator is a powerful tool available for credit professionals, where they can learn more about state statutes.