AHG Services, LLC tips from ASA for Avoiding Project Financing Traps
Adequate project financing is an important key to subcontractor solvency. Subcontractors must pay close attention to project financing and their rights to information about that financing when bidding and working on a project. This is especially the case when the prime contractor is using pay-if-paid language in its subcontract. When a subcontractor is asked to “share” or “assume” the risk of owner non-payment, then the prime contractor may care that much less to assure adequate project financing on its own, and is more willing to let proof of adequate financing slide. A subcontractor can ensure that its contract permits it to assert lien and bond claims notwithstanding contingent payment language, if it negotiates the appropriate subcontract language, but such security generally will be inadequate to make a subcontractor truly whole after a job gone badly. Subcontractors can seek guidance and support from the Guidelines for a Successful Project, a joint product of ASA, the Associated General Contractors of America, and the Associated Specialty Contractors. The “Guideline on a Contractor’s Payment Rights, Obligations and Responsibilities,” point outs:
“It is your responsibility to understand the adequacy and source of the money for each project. You have a right to this information upon request. In most cases, there will be a financial arrangement in place: i.e., loan, line of credit or owner-supplied funds. It is appropriate for you to assure yourself that enough money and/or credit is in place and that you understand the terms under which the money/credit can be accessed.”
The “Guideline on the Owner’s Ability to Pay” points out that adequate financing “includes funding to make all progress payments, release of retainage, and final payment promptly as provided for in the contract documents, as well as a sufficient reserve to pay for changes and any claims.” Generally, the prime contract gives the prime contractor the right to obtain evidence of adequate project financing. For example, the ConsensusDocs Form 200, Standard Agreement and General Conditions Between Owner and Constructor, states:
“4.2 FINANCIAL INFORMATION Before commencing Work and thereafter, at the written request of Constructor, Owner shall provide Constructor with evidence of Project financing. Evidence of such financing shall be a condition precedent to Constructor’s commencing or continuing the Work. Constructor shall be notified of any material change in Project financing.”
The subcontractor’s right to financial information also should be a continuing right for the life of the project.