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You Never Give Me Your Money_ Navigating Conditional Payment Terms on Bonded Projects Webinar
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Good afternoon. Welcome to PCI's webinar series. Today's presentation is, You Never Give Me Your Money, Navigating Conditional Payment Terms on Bonded Projects. This webinar is in partnership with Navco Precast and Hudson Lambert Parrott Walker. My name is Royce Covington, the Manager of Member Services at PCI, and I'll be your moderator for this session. Before I turn the controls over to our presenters today, I have a few introductory items to note. Earlier today, we sent a reminder email to all registered attendees that included a handout of today's presentation. That handout for this webinar can also be found in the handout section of your webinar pane. If you cannot download the handout, please email pcimarketing at marketing at pci.org as shown on your screen. Note that all attendee lines are muted. The GoToWebinar toolbox has an area for you to raise your hand. If you raise your hand, you will receive a private chat message from me. If you have a question, please type it into the questions pane, where I'll be keeping track of them to read during the Q&A period. Also, a pop-up survey will appear after the webinar ends. Today's presentation will be recorded and uploaded to the PCI eLearning Center. Questions related to specific products or publications will be addressed at the end of the presentation. PCI is a registered provider of AIA CES, but today's presentation does not contain content that has been endorsed by AIA. Today's presentation is non-CEU. Our presenters for today are Brian Roberts. Brian has over 30 years' experience in financial auditing and controls in the construction industry, including time spent with developers, the federal government, general contractors, and now a CFO of NAPCO Precast in San Antonio. Brian is a Certified Construction Industry Financial Professional, a designation awarded by the Construction Financial Management Association to those industry professionals who meet educational requirements, have thousands of hours of experience in the industry, and successfully pass a written exam. He is the CFO of NAPCO Precast, LLC, which provides prefabricated building systems for everything from parking structures to sports stadiums, from its locations in San Antonio and Broken Arrow, Oklahoma. Joining Brian is Anthony Lehman. Tony has been a construction lawyer for over 23 years. He started his career with Smith, Curry & Hancock before spending 12 years with two international law firms. He has been a partner with Hudson-Lambert-Parrott Walker and its predecessor firm, Hudson-Parrott Walker, since 2015. He serves on the Governing Committee of the American Bar Association's Forum on Construction Law, the world's largest construction lawyer organization, and he is a past member of the Board of Directors of the Florida Pre-Stressed Concrete Association. He is a board-certified in construction law in Florida, one of only two states to have such a designation. I'll now turn the controls over so that we can begin our presentation. Good afternoon, everybody. I just wanted to thank you all for coming out to this presentation online here. Brian and I have worked on this presentation a couple times now, and we're really excited to be able to talk to you about working through pay when paid clauses, pay if paid clauses, and how they affect your ability to get paid on projects. To give you a little thumbnail sketch of where we're going, we're going to start with describing what the difference is between pay when paid and pay if paid clauses, where they're enforceable and how they're enforced, what their effects are on payment bond claims, possible effects that they might have on lien claims, what could be claimed under the payment bond or lien, and then negotiating these clauses. Please ask questions as we go along. We have found that it helps us to answer your questions when you have them. Sometimes we'll already address them later in the presentation, but for the most part, it helps us to know what you want us to cover as well. This is actually a very large topic, and so we want to make sure that we're addressing the issues, the concerns that you have. So to channel Whitney Houston from the mid-'80s, how will I know whether it's a pay if paid or pay when paid clause? These conditional terms are everywhere, and it's sometimes difficult to know what the difference is. So if we talk about first the pay when paid clause, it's literally all about timing. The example that we have for you is this. The contract will say that the general contractor will pay the subcontractor within 14 days of receiving payment from the owner for the work of the subcontractor. Now, this supposedly just fixes a time for payment and doesn't suspend the right to payment indefinitely. Now, I mean, I read that and I say, it sure sounds like the requirements here is that payment has to come from the owner before the payment is made. And as we'll see, some states actually view it this way. A lot of states do not. And they view a clause like this as just establishing a timeline for when the payment will come. It's actually that the general contractor will pay within 14 days of receiving payment or in a reasonable time thereafter. That stuff gets implied in by the courts because they don't want subcontractors to go unpaid, meaning that the risk of the owner failing to pay is on the general contractor. Why is it on the general contractor, though? It's a simple policy choice. The idea that the general contractor chose the owner for whom it's working and the subcontractors relying on that general contractor to make good decisions in that process. So pay if paid is kind of the opposite. It puts the onus and potential for owner nonpayment on to subcontractors. Therefore, that's why I say hope for the best, but expect the worst. Here's an example. This is a broad example. And as you can see on the screen, what it says is the general contractor will pay the subcontractor within seven days of receipt of payment from the owner for subcontractors work. Provided, however, that payment by owner to GC for the work of subcontractor shall be an express and absolute condition precedent to general contractor's obligation to pay subcontractor. Subcontractor hereby agrees that it shall assume the risk of default and nonpayment by the owner on the project for any reason whatsoever. That's a very broad clause because you're not only assuming if you're the sub, which I'm assuming for this discussion we're all we're acting as a subcontractor right now. If you're the subcontractor, you're risking that the owner will go broke. They will default under their obligations on the contract, and you'll have installed a bunch of work that was perfect and yet never get paid for it because the owner refuses or can't pay for it. It also risks the idea of, let's say the electrician falls down on the job and screws up, doesn't show up, and that causes the work to be delayed even though your work isn't even affected by it. The owner can decide that that default under the general contract is sufficient to withhold money from the general contractor for everyone, meaning you're not getting paid because some HVAC guy or some electrician decided that day that he just didn't feel like doing the work. So how do we tell the difference? The difference is the key words condition preceded. Nearly every state that enforces these pay if paid clauses as different from the pay when paid clause requires express clear and unambiguous language that creates payment from the owner as a condition precedent to the general contractor's obligation. Essentially, it affects, I mean, well, they say the law doesn't like to have people defaulting or giving up their rights because conditions aren't met. In this case, this puts the risk of the nonpayment directly on the subcontractors. Now here we would normally stop for questions, so if you do have questions, please go ahead and type them into the chat box so Royce can read them off, and if we have something specific on it, you know, we're happy to address it. I know something that Brian and I have talked about in the past is why would anyone ever agree to a clause like this? And I mean, one simple answer is A, you need the work, or B, your market is such that you have to accept clauses like this. I mean, we're in, I'm in Georgia, and in Georgia, it's almost a guarantee that every single subcontract has this clause, and if you want work, you're gonna have to pay, you're gonna have to deal with it. You're gonna have to deal with the potential for it. So let's look at the enforceability question, unless there's any questions. Royce, I don't think there's any questions, right? Okay, good, very good, thank you. So let's look at enforceability. The majority rule is something that where the pay when paid is different from pay if paid, but there are other options for this. The worst ones for subs in terms of enforceability, and I say worst because it doesn't have to even be a condition stated in the contract. Arkansas, Connecticut, Georgia, District of Columbia, Idaho, Illinois, and possibly Maine, there's been some case law where they've hinted at this in Maine, are saying, say essentially, we're not going to try to come up with that artificial difference between those two different clauses. We're going to say both of those are sufficient to create a condition for payment that the owner makes payment to the general contractor first. The other side of the coin, where it's best for subs, where the general, the legislatures in these states and or the courts in these states have decided that these clauses should not be enforceable, include California, Nevada, New York, North Carolina, the Virgin Islands, and Wisconsin, maybe Montana, and then also want to highlight a new one, which is in Virginia, which just recently in April passed a law to make most enforcement, most of the time, enforcement of these clauses will not be allowed in Virginia. There are some limited exceptions that you have to dig into the statute to find, and this is not the first time you'll hear this, nor the last time. This is the first time this presentation, but not the last time. If you have an issue in Virginia of a clause like this, you should contact a Virginia lawyer to help you out with it, because they're going to be more well-versed than someone sitting in, say, Arkansas on that subject. I will add that Delaware does not enforce them for building projects only, but on highway projects they are acceptable. That's the Delaware DOT deciding it needed special treatment, so if you're doing precast culverts for a highway project in Delaware and have a pay when paid or pay if paid clause, it will be enforced. There are a few states we don't know. Like I said, Maine is a maybe, but otherwise it's North Dakota, New Mexico, Rhode Island, South Dakota, Vermont, Wyoming, just don't have any real clear guidance from those states on where they're going to go with enforcing these clauses. But everywhere else, pay when paid is different from pay if paid, and pay if paid requires clear and unambiguous language to create that condition precedent to payment for the subcontractors. Now, I'll note that there are these states where I've said that there are the worst. Most of these states, I know Georgia in particular, has other remedies such as filing a lien on the project that will allow you to get paid even in the face of a pay if paid, pay when paid clause. So, we know that's the issue. How do we get to the issue of dealing with it in your negotiations? You know, you're trying to work with them, Brian, and they won't budge, or you've worked with these GCs before and they are not great on paying in a timely manner, or you never heard of the owner before, or you have like a standard contract you've agreed to previously that it has a pay if paid. What do you do to try to deal with these issues? Thanks, Tony. So, the three items that Tony just kind of discussed, it's all about mitigating and managing the risk. And so, for us, it's, you know, there's the legal law, the part that Tony's talking about, but, you know, how do you work with the GCs when you need to try to change the language, or what are the things that you want to be trying to take a look at? So, if we can move to the next screen. Sure. So, on there, what we want to talk about is that what are, as a subcontractor, you know, you're now reliant on the owner's credit worthiness. And so, that's because that the GC is attempting to put the risk on you. And so, what we've, even before the last year, but I don't know if you all have seen this, so I'd be interested to know what other people are seeing in different parts of the country. Almost every subcontract we get from the GC now talks about how the credit worthiness of the owner, it's the responsibility of the subcontractor to do their own due diligence and to come up with their own, basically, process of mitigating the risk in their, basically, how they view the ownership and their credit worthiness. So, some of the things that we had been doing previously, but even more so now, is some of the things that you want to get is you want to get the project name. You want to know who the owner of the real estate is, the ownership legal entity. And so, a lot of times, so we do a lot of multifamily. And so, what we'll see is that, you know, each individual project is set up as an LLC. So, that would be like a single purpose entity or an SPE. The project, and when you do that, at least what we see, like a lot of times LLC, it's really just kind of a shell that's housing, you know, and controlling the risk, you know, for that particular project. And so, if you're looking at, you know, whether you need to be looking at what is the amount of equity that the owner has in the project, we like to see at least around 40% or so, you know, who is actually the lender, you know, who is, make sure that you get the debt agreements. I was telling Tony, a lot of times, because multifamily, they close on the land right before the project starts. And since we do precast garages, you know, we're the first people usually that are in. So, a lot of times we'll have the documents, the legal, I'm sorry, the loan documents, but we'll have to ask for a final copy of the final execution, you know, once those are completed. Let me interrupt you for a second. You said you want to see 40% equity. Why is that? Well, what I want to do is I want to make sure, especially since we're some of the first people in, that if there's any issue with the loan, that there's enough equity in the project that we're going to get paid. And if they've got enough equity to at least start the process in case they run into any issues, you know, throughout the project. You know, another thing, Tony, we haven't really touched on it yet, but we're going to, is what I'd say, getting your ducks a row, getting as much of your information up front. So, you know, one of the other things we like to do is get a legal description of the property. And Tony, why is that such a good thing to do? Well, I mean, you need that legal description if you're going to end up potentially having to file a lien. I mean, you obviously never want to have to file the lien, but in nearly every state, you need some sort of property description. Sometimes, an address is enough, but in most, in a lot of states, they'll require an actual legal description. You know, our general practice when we get those is to just literally find the deed that's the last in line, take a snip of it and paste it right into the lien document so that way there's no mistyping, there's no issues about any kind of typographical errors in the description, but you want that legal description available so you can file your notices, you can serve your notices, you can file your lien if you have to at the end of the project, you can look up notices of commencement if there's a requirement or an ability to file those in the state you're working in. All of those again tend to be state-specific in terms of when notices have to be given, when the liens have to be filed, you want to, you don't want to be caught though short and find that you have a lien deadline of 90 days after you finish your work and you're on the 88th day and you don't even know what where the, how to get the property description. That's a great point and so thank you Tony. So it kind of leads to really all, so my background is audit and accounting and finance and so I've always been taught to get the documents, get everything up front. You know, another thing that you might want to talk, think about getting is if the prime contract, you know, a lot of times the GC will reference the prime contract and the subcontract and we always try to get that limited to our scope. We usually don't have very good luck with that, so we always get a copy of the redacted prime contract, you know, we do a full review on that, whether it be our legal counsel, we bring them in a lot of times, just depends on the subject matter of the project. The other thing is you want to verify too that the funds that are going, that are available for the project are greater than the amount of the construction project. So we know things are going to go wrong, we know there's going to be change orders, but you want to make sure that there's going to be enough money to cover all those contingencies and things that are going to change, you know, during the course of the project. You know, I'll point out just as an aside with that prime contract, there are even a few states where you can have the waiver of the right to file a lien given up contractually before you perform work on the project and the general contractor can actually do that on behalf of their subs. So that's one of those traps for the unwary potentially. I will tell you that in Alabama, you can waive the right to file a lien on a project before you do work. So in those situations, not only should you be looking at figuring out how to, you know, if there's a way around the pay when paid clauses, but you see that kind of language, you might want to start running about as fast as you can away from the project because you have no protection whatsoever. And one of the things with our legal counsel, and I'm located in Texas, is, you know, we talk about we'd rather spend money up front and have discussions up front and not have to basically try to catch our tail on the back end when things do go sideways. And so, I mean, it's probably the least favorite thing of my job is to actually have to negotiate through contracts, but it's just so critical and so important. We always just try to present it in a way that, you know, we're both companies. We both want the same end result, and so we want to try to partnership with that as we move forward. And so that's, you know, kind of why we're sitting down and going through the contract with them. I'll talk about MSAs in a minute. The last couple things I was going to talk about were, you know, owner financial statements. Not always applicable. It's an LLC, but what you do is you probably know who the parent is, and you can talk with, you know, talk with them directly to get their financials. One of the other things that we've seen is an owner certification. They provide information that the information is correct and accurately represents the facts supporting the financial viability of the owner, and that all information is supported by reasonable and credible evidence from all applicable lenders, banks, and depository institutions. And then you want to make sure that you get that notarized. The reason why I was reading that directly, and I can provide that that sentence later, is I didn't want to miss anything on it. But one of the things Tony and I also talked about is that it might be a really good idea to get the owner to certify that we, the subcontractor, are relying on their information, is by doing that, then what you've kind of taken away the fact that if they gave us information that we couldn't rely upon, they've at least legally stated, and we've got a notarized statement, that we, that they put it out there for us to rely on. Brian, we have a question. Sure. This question is, what is the best way of requesting this information? We find that it is hard to receive this information from the general contractor, or asking directly from the owner. Do you recommend an outside service, or do you find that you can get this easily, get this information easily? I can just tell you based on our experience, I have not used an outside service. What I have found, now this may be a little different, we work with a lot of the same GCs and ownership groups over and over, so maybe it's a little different, but actually I can use. We actually started with a brand new huge GC out of Florida for our very first project a year ago, and so here's how I approached it, and it worked fine. First, we talked with the GC. The GC, we'd worked with the GC, I'm sorry, we had not worked with the GC before, but we established a relationship with the project manager at the GC, and then explained to them that we would like to have a conversation with the owner, because the owner had not closed on the land yet. And so, you know, we were a little concerned, we wanted to kind of see, you know, what were the finance, you know, how much equity do the ownership have in the project, as well as the debt and who the lender was going to be. So we asked if they would set up a conference call, you know, between us and the lender, I'm sorry, with us, the GC, and the owner, so that way the GC was present, and they agreed to do that. And we had probably, you know, a 15-20 minute call, and after that, you know, I felt very comfortable with the ownership group and the GC, as well as they also agreed to send us their financials. So I think that would probably be my recommendation, is always start with the GC, because you never want to go past them without their permission. Keep them involved, and then see if you can just have a conversation with them in the ownership group. And, you know, one tactic to consider in that discussion is just to say, you know, Mr. GC, you know, we haven't worked with you before, you're asking us to rely on the owner's creditworthiness, and so the only way we can really satisfy ourselves to that is for you to work with us and set up this conversation. Even on GCs you have worked with in the past, you can have that same statement, you know, you want us to agree to this clause where we're essentially bearing the potential responsibility for owner non-payment. We have to be able to assess that risk for ourselves in a way that we don't want to do in a way that's threatening, we don't want to be demanding and such, because that gets everybody off on the wrong foot. But you do want to have the ability to look at their financials and talk to them about those issues. You know, one thing that actually can help in the precast industry a lot of times is that you'll find you're actually doing pre-construction engineering services and pricing efforts for the owner directly before they even get the general contractor involved. They'll be pre, you know, especially if they're doing a building that involves like some of the parking garage that has some engineering involved or they have some precast, architectural precast that they want to make sure they're getting attached properly and with all the right engineering, and so they want to have you involved in that pre-construction time frame. That's a good opportunity as well to know to say, look, you know, we're definitely going to want to work on this, so we want to make sure that when we get with the general contractor, if they're going to ask us to agree to conditional payment, you know, we want to make sure that everybody's on the same page. So in those times, it sometimes is a little bit harrowing for the general contractor because they're like, man, this owner and this sub have a great relationship, I can't screw that up. But at the same time, that gives you a little bit, at least gives you a little bit of leverage at that point. The only other advice I would throw in there is that pick up the phone and call them. You know, the email thing is easy. I'm an accountant by trade. I'd be just fine if you guys close the door and turn off the lights and just let me work and nobody bothered me, but it doesn't work that way. So, you know, what I've just found is just pick up the phone, you know, try to develop that relationship. There's also a good chance that you've already been having multiple conversations with the GC as you've been negotiating through the contract if you don't have an MSA in place. And so that's another example, that's what happened here. I had, you know, we traded a bunch of emails first, you know, because you're basically going through and redlining the contract and sending it. Then you get down to a point where you've got, you know, 5, 10, 15 action items left and it's easier at that point to kind of pick up the phone. One thing Tony and I talked about is that we as precasters are very different from a lot of other subcontractors that subs, I mean, that GCs have on their projects. You know, we're truly more of a manufacturer and supplier with, you know, we have the erection component, but a lot of these subcontracts are written for like, you know, your HVAC, your plumbing, your electrical, people that are gonna be on site for a long period of time. So I think it's always good just to have that conversation with them when you do that. So good question. Hopefully I answered it and I'm always looking to learn. So if anyone has thoughts and ideas, you know, you can reach out to me through my email or, you know, through here. I would love to know what other people are doing too because I guarantee you there's some things that we haven't thought of. So next, can you do the next slide? Oh, I got it. Excuse me one second. This was a lot easier if we did this in person. Let's see. So different ways to mitigate risk is, we talked a little bit, try to create an MSA. So we work with a lot of the GCs, the same ones over and over. When I started with NAPCO Precast a couple of years ago, one of the things I wanted to do was to go ahead and take the time to review back through all of our contracts. It didn't look like they had really been reviewed in probably at least five or six years. And the contracts were pretty much just getting executed as they were. And so same thing, I picked up the phone, I called every time with the GC, we got a new contract, I explained to them what we were attempting to do and that we wanted to make the workflow much quicker in the future. And so by creating the MSA now, all we'd really have to do is focus on the scope of work, some insurance, some things that might be specific to the project. I'll share a very quick story that I had one GC that didn't... He wasn't interested in doing that, so he asked me to pay for his legal fees. Normally, I would have probably said no and bowed up and been like, no, you need to take care of your own, but it was a case where I knew that we had seven projects coming down the line that had not been negotiated yet and finalized. So I did a quick calculation in my head and figured that for the $5,000 that I might have to spend on his legal fees, I was gonna get a much better MSA that I could go home and sleep at night and that we had a bunch of projects that would flow into the pipeline. So I'm not saying I recommend that with everyone, that was just a weird case and that's how we handled that. If you just click, you can... Just click, it'll go. Okay. So subcontract reviews with outside and in house counsel, that was one of the things that we started then also for these MSAs is our counsel is external, but we partner with them, work very closely with them, so I highly recommend it. One of the things we'll talk about as we go through this too, Tony will really hit on it, every state is so different. They get someone that is within your state that you can rely on to have those conversations with. Tony has a lot of contacts throughout the United States and he'll be happy to help somebody. If you don't have counsel and you wanna talk with somebody, Tony will be the first person to tell you that he's not the person to advise you on the state of Wisconsin, but he's gonna be really good on the state of Georgia and the state of Florida. Despite the fact that I grew up in Wisconsin, I tend not to practice law there. I will note that one of the things as well to think about, I've said this before to my friends in Florida when I gave a presentation there, the thing with the subcontract review will do is, the lawyer is not gonna tell you, you can't enter the contract, but they're gonna try to flag those issues that are important. And as I made the joke about it saying, I'm not here to tell you no, I'm here to tell you no, as in know what risks you're taking on. And that's the important side. Reducing risk means understanding risk, because you can't avoid risk in this industry, you just have to decide which ones you want to take on. Yeah, great point. Thank you, Tony. Obviously, if you can get the repeat owner or repeat GC, especially if you put an MSA in place, you're developing that partnership with them, and so that definitely helps as you go through this, as you mitigate the risk. And then the last piece is, you might need to change your pricing. So what if you're working with a GC that is notoriously late on payment, or an owner, that instead of taking 45 days, they're constantly running 60 to 70 days? Well, you know that you potentially are gonna have cash flow, so you probably wanna take a look at pricing your contract to reflect those pain points that you're gonna have related to that. At the end of the day, it's gonna be a business decision, and as Tony said, we're gonna have risk in all of our projects, but just managing through that and thinking about the different ways that you can mitigate that. Yeah, it's something I've talked to Brian about before too, and that I've spoken about before, is the idea of how to allocate risks best. And the most ideal way to allocate a risk in a contract is to identify the party who is best placed and in the best position to manage and avoid the risk that is being looked at. If it's the risk of payment, arguably that should be the general contractor, but they wanna spread that risk to their subs, so that's where you end up negotiating these issues, trying to get to the owner for the discussion on financing and financial wherewithal. Yeah, so exactly what Tony was saying, we've talked about this a little bit earlier, it's... You wanna try to get with the owner to figure out the ownership side, but always go through the GC to do that, you don't wanna go around them. And identify the information up front, the things that you're gonna need related for liens or things that you may need to do later in the project. So we can open this also up for questions, if anybody has, but like I said, Tony, I'm always interested in what are other people doing? So if anyone has any thoughts on what you're doing about this, we'd love to hear about it, whether it's right now or via email or something like that. Yeah, I've heard in terms of industry best practices, I mean, some of these things we've tried to convey, the idea of doing that investigation into the owner before you agree to take on that risk. I mean, if you're gonna be the one who's bearing the risk, the owner is gonna go under. Maybe it's better to work on Amazon projects, even though Amazon's gonna be the bear to deal with on specs and submittals, for example. I don't know that they are, I'm just saying it for example. But on the other hand, they're probably not gonna go under, and if they do get close to going under, Jeff Bezos has a few extra billion you could use to refloat things. So there's the quality of the owner, there's the issue of the timeline for production that you're gonna have to deal with, and there's the issue of long standing relationships that often can come into play as well. You might have a GC that's like, yeah, I know they're a little bit crazy or a little dodgy, and that's why we're trying to spread the risk down to you, but we hope that you'll work on this project. And you might... If you have a GC who's coming to you with projects like that, where they wanna bring the dogs that have fleas, as opposed to the ones that are happy and healthy and ready and running around, maybe that's when you start giving them that aggravation bid, so they realize that you can't be taken advantage of unless you really, really need the work. Right. And the other part too is your backlog. Right now, most of us have backlog probably up through the next year, but there's gonna be times when we're not gonna have that backlog, and so you might have to look at the way you're mitigating your risk a little differently, because you know that you've got overhead and things that you have to cover. The thing is, you just gotta go into eyes wide open, get your PMs, get everybody on your staff, understand what the risks are up front, so that everyone on the team can help you manage through it, not just one person who's negotiating the contract. And maybe one final off-the-wall type of negotiating tactic might be to, if they're gonna make you have a pay-when-paid, if they have a pay-off-paid clause in your contract, maybe you try to negotiate some sort of material cost increase clause into the contract as well. I mean, I know cement is going a little bit crazy right now in terms of pricing, and there's shortages, and people saying they're cutting your allocations by like 40%, giving you about three days' notice. You know, those issues cause you heartburn and problems, and cause you not to be able to manage and meet the requirements that you have for your production. And those types of issues are ones that if there's a way to negotiate them into the contract by giving up a little bit on the payment clause side of things, by getting some agreement that they'll take care of, you know, say five, 10, 15% cost increase, it might be worth it. You know, you can't, it's like everything, you can't view this in a vacuum, because there may be other parts of the contract that make it almost acceptable. Yeah, and I could go on for two hours about price increases and contracts, but that's not what we're here to talk about today. So I'll be, I'll talk with anybody else about that offline, but that's just. That's next week's presentation. That's right. So you were going to talk about payment bond claims, and we've got public and private projects, and if you could just kind of talk a little bit about that, Tony. Yeah, and you know, one of the things that comes into play with, if you have a pay when paid, pay if paid clause is, sometimes it can affect whether you can get, even reach a payment bond on a public project or a private project, and there is a dichotomy between federal and state or local projects as well that comes into play with some of the, in some, some circumstances. So let's talk first about federal. Federal is simple. Federal is nice because federal is that payment, that conditional payment clause is unenforceable as to the surety. It's still enforceable as the general contractor, but not as to the payment bond surety. So what that means is the end around that your good outside attorneys should be doing is suing the payment bond surety in federal court in the location of the project to seek payment, and then let that surety try to bring up that there's a pay if paid clause because it's not gonna matter. They just have to pay. The contractor, I mean, that's, and you have to keep in mind, you have some tight deadlines on that in terms of notices and in terms of timelines for filing the suit after the work is done. One year after your last work on that project, you have to have that payment bond claim filed in federal court. On the state and local level, I make this joke regularly, lawyers make this joke regularly that the answer to every question ever asked is it depends. Now, that may be different if you're talking about your age, but perhaps it still depends. There may be a time you want it not to be what it is. In any event, it really depends in terms of state and local law on whether a pay if paid, pay when paid provision will affect your payment bond claim rights, even on a public project. In some states like Georgia, they'll just say, well, the surety bond incorporates the underlying obligations of the contract. So if that contract has a conditional payment clause, so does the surety bond. It's not an ideal situation because unlike a private project, you can't file a lien. You can only make a payment bond claim. So you're just stuck waiting it out at that point. And in those situations, sometimes you just have to file suit and let it sit there so you don't miss deadlines. Private job payment bond claims with pay if paid, pay when paid. Yeah, there's my answer, it depends. Again, it's not unlike the scenario I was just discussing in the public sector, but it's more likely in the private sector that a surety bond, a payment bond will be allowed to have conditional payment language in the scenario of incorporating the underlying obligation through the subcontract. There is one outlier of interest, and it's of interest to me because I'm certified in construction law, board certified construction law in Florida, but there's tons of work in Florida, and so it's also of interest to a lot of people. Florida has this weird thing they call a conditional payment bond where if the payment bond itself incorporates the conditional payment language, it becomes effectively a pay when paid payment bond. So it covers the subcontractors only to the extent the general contractor's been paid. Now, sometimes that can come in handy when you have a little bit of a shyster of a general contractor who decides to take the money and run, as Steve Miller would say. Then the surety is responsible up to the amount that the general contractor's been paid, and then the owner is still responsible for anything that hasn't been paid. So if you had a project where you're owed $500,000, and the general had been paid $200,000 of it, and there's $300,000 left to be paid, what Florida law allows you to do is make a payment bond claim for $200,000 and file a lien for the other $300,000. It's confusing, it's difficult, it's a pain, but on some levels, it sort of makes sense if courts are gonna allow for a surety bond to be conditional. Frankly, I think it should say it on the front so the owner knows they're not getting a full surety bond that protects them from liens or protects them from subcontractor nonpayment. Briefly, why might a surety get the benefit of the pay when paid? The simple answer is, there's two real answers. First, it's a black letter law for sureties that they get to take advantage of the defenses of their principal. By that, I mean, if the principal says, well, I don't have to pay this sub because they defaulted on the project and walked off, they don't get paid that money. I had to use that money to finish their work. The surety gets to use that defense. So in that regard, the argument goes, the surety should get to say, well, my principal hasn't been paid on that project yet, so I don't have to pay either. It kind of defeats the purpose of the payment bond. Secondly, there's the idea of incorporating the underlying contract and its payment terms. This oftentimes comes into play more in arbitrations where sureties get dragged into an arbitration between the sub and the general when nonpayment is one of the issues and courts have generally enforced that, said surety, yes, you have to go to arbitration. Now, there's other reasons why they'd enforce that, strong federal policy towards arbitration, but that said, that's where that kind of idea comes from. I'll again ask if anybody has any questions, but have a little bit of things we want to cover here, so I'm not going to linger too long because I want to talk about liens a little bit, how it could affect a lien claim. Louisiana's weird. Louisiana, as you know, if you know anything about the law in Louisiana, it's based on the Napoleonic Code that was in effect in 1803 when we made the Louisiana Purchase, so therefore, it's like its own little world and it's its own little, they have different language. It's not a lien. It's a claim of privilege. It's silly, stupid stuff like that that drives me nuts, but what really drives me nuts in Louisiana is the idea that you don't have a right to file a lien unless you have a current right to payment, so if you have a pay when paid clause, arguably, you can't file a lien because you don't have a current right to payment. That would make a lien that you file invalid and you may have to remove it. Other states don't tie liens to the right of payment, like in Georgia here. If there's a pay when paid clause and the owner hasn't paid, the sub still should file their lien and it actually allows them, if the owner never makes payment, to skip a step in the process. Normally, you have to sue the general contractor, get a judgment first, and then you can go after the owner. You get to skip that first lawsuit and go directly against the owner because, after all, they're the ones who have the money. They're the ones who haven't paid. Some states will say that if you file the payment bond with any notice of commencement requirements that there may be, that will preclude liens. That's Florida. If a lien gets filed, you just have to file a notice of lien attaching to bond and the lien goes away. You don't have to buy a special bond to get rid of the lien. So, in that state regard, there's different processes that get involved with what notices you have to give and to whom and how far down the chain of privity on a project you can be before you can make a claim. It gets really confusing, as you can see. I didn't bring up those three states to say that they're out of the ordinary. They're actually, Louisiana probably is out of the ordinary, but Georgia and Florida are pretty in the ordinary when it comes to lien issues. So, especially with liens, check with your local attorney. And the reason I say that is, the best way for a construction lawyer to commit malpractice, the easiest way is to screw up a lien filing. And so, because they're very prescriptive, they're very specific, and if you screw up one little detail, you don't have a lien claim and suddenly you have a client looking for $500,000 in payment from someone when an owner goes belly up and a GC runs off with the money. Quickly, there's a public-private problem, as I call it. The P3 projects, you hear public-private partnerships all the time, and this seems to be coming up more and more frequently across the country. I've talked to other construction lawyers about it and they have said the same thing, that there are a lot of projects these days which are on public property that have been leased to private developers for development. Let's say you have a downtown development authority in a smaller downtown area, let's say a 50,000-person city, and they want to have some affordable housing and they want a parking garage that can be used by the public to attend things in the downtown area. So, they tie all those together in one development, it's on public property, it's a 20- or 30-year lease of the grounds for the people who develop it to make their money off both the parking franchise and the rental of the apartments, but because it's effectively a private project in that regard, and unlike on most public projects where because you can't file a lien, there's a payment bond, suddenly there's no bond requirement, it's outside the bonding statutes. This is true, I've heard of people complaining about this in North Carolina, in Florida, in Georgia, and in other states as well. It's a difficult situation because you end up filing a lien only on a leasehold interest, and that's all you can get. You can't file a lien on the public property because you can't sell the public's property at sale to satisfy your lien, which is the whole point, so you end up, in that regard, maybe you end up with a parking franchise where you get your money back a dollar at a time. All right, so we have this in here, and I'm not gonna play this song because, frankly, it sounds pretty bad through the internet. The Beatles, when they were nearing the end of their initial contract with Apple Records, wrote this song called You Never Give Me Your Money, and part of the line is, in the middle of negotiations, you break down. They were trying to renegotiate a better deal for themselves after their first contract because, boy, did they make Apple Records a ton of money, and so they held out and got a better deal for themselves. How do you do this? How do you avoid the situation breaking down in negotiations? Well, as we kind of talked earlier, revise the clauses allowing nonpayment only in the event of subcontractor default, whether interim payments or final payments, and so, obviously, we don't ever wanna get in a situation where the GC or a sub that's tied to the GC caused an issue for nonpayment by the owner when the work that we did was performed adequately, according to schedule, and we run into this all the time in contracts where we see this clause, and so we push back against this and try to rewrite. Usually, it takes a couple drafts to get it rewritten to the point where the GC will accept it, but all we ever ask them for is we just say, look, if the issue's on us, we're gonna take care of it. If the issue's on you, we're just asking you to take your equitable share of the issue as it relates to you, and if you contact with the GC regularly, hopefully, you can put together an MSA. It takes care of the payment conditions. It's a lot less hassle to worry about. That way, you're focused on the scope of the work. We always kind of kid. Everyone just wants to take the contracts, throw them in the drawer, and never pull them out, and that's what we tell our partners. We just wanna build your projects. We wanna build a high-quality, on-time schedule where you don't have to worry about us as a subcontractor. Let's just put some terms in here that are fair to everybody, and in case there is a problem, we can go to the contract and kind of keep the emotions out of it, and kind of really, the other thing we've talked about, too, is at the end of the day, we're mitigating our risk, and it has to be a business decision. There's just so many variables and factors that go into every contract and every project that we're looking at today. And from my perspective, if you might have picked up, there's been kind of a music theme throughout, and one of my favorite bands since I was in college, 30-some years ago, is The Clash, and The Clash had a song called Know Your Rights. Well, these are your rights. Is there a payment bond? Do you have lien rights in the face of a pay-when-paid clause? Do you have the ability to negotiate your payment terms? All of these are issues that you should try to figure out before you enter into a contract. Most importantly, and I say this not as an attorney, but I say this in the context of mitigating your own risk. Get a construction attorney. You're better off paying $5,000 up front and not losing $5 million because you end up getting stiffed. You know, penny-wise and pound-foolish. Let's try to avoid that. If you need an attorney, get one. If you don't know of an attorney, let me know. Happy to help out. I actually helped out someone. We gave a version of this talk back in Kansas City in March, and I was actually able to connect a guy in Ohio with a good attorney up there that he needed to help out his family business. That's what we want to do. We want to make sure we can help you out to get to the right people to handle your issues in your state. So with that, if you have any questions, we'd welcome them. That's the end of our presentation. Thank you very much for your time and patience, and I'll turn it back over to Royce if he has any questions. Thanks, Brian and Tony, for a great and informative presentation. The Q&A portion is open. We're going to wait a little bit to see if we have any questions come in. If not, then we will end the session, and any questions that come in after will be forwarded to both of our presenters so that they can reach out directly to you. All right. You know, when I do this in person, a lot of times I'll make it, all right, fine, we have five minutes left. Ask me anything, but let's just try to stick to these questions. But I mean, seriously, if you have something that's sort of related to what we were talking about, we'd welcome the opportunity to maybe address it, maybe help you out with the situation. Okay. I think we have a question here. Someone raised their hand, but if you raised your hand and you have a question, please just type it into the questions pane. Otherwise, it'll show up as a chat message. Don't make me call on anybody. That's right. And good thing she's muted, so she can't speak back to us. Well, it looks like we don't have any more questions. So again, we'd like to thank you so much for the excellent presentation. If anyone has any questions that you can think of after this ends, please email marketing at pci.org. As a reminder, there will be a pop-up survey after the webinar ends. Thank you again. Have a great day and please stay safe.
Video Summary
The video is a webinar presentation titled "You Never Give Me Your Money: Navigating Conditional Payment Terms on Bonded Projects". The webinar is part of PCI's webinar series and is in partnership with Navco Precast and Hudson Lambert Parrott Walker. The presentation is moderated by Royce Covington, the Manager of Member Services at PCI. The presenters are Brian Roberts, CFO of NAPCO Precast, and Anthony Lehman, a Construction Lawyer. <br /><br />The presentation focuses on navigating conditional payment terms on bonded projects, specifically pay when paid and pay if paid clauses. The presenters discuss the difference between these clauses, their enforceability, their effects on payment bond claims, and their possible effects on lien claims. They also provide advice on negotiating these clauses and managing risk in contracts. The presenters emphasize the importance of conducting due diligence on the owner's creditworthiness, obtaining necessary project information, and involving legal counsel in contract negotiations. They also suggest revising contract clauses to ensure payment conditions are fair and that both parties are protected.<br /><br />The video concludes with a Q&A session where attendees can ask questions related to the presentation. The presenters provide answers and offer additional insights. Overall, the webinar provides valuable information for contractors and subcontractors dealing with conditional payment terms on bonded projects.
Keywords
webinar
conditional payment terms
bonded projects
pay when paid
pay if paid
enforceability
payment bond claims
lien claims
contract negotiations
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