Most articles on construction law focus on proper contract documentation—and of course that matters. But in my experience, it’s only half the battle. The other half is equally important: how financially responsible is the other party to the contract, both at the time of contract signing and throughout the job?
Consider two realities that most clients simply do not appreciate:
- Roughly eighty percent of judgments are never collected. You can spend a lot of money and emotion to win the case, obtain a judgment, and yet 8 out of 10 times still walk away with nothing.
- The median small business has only about 27 days cash in reserve. By year end, many will have drained their reserves entirely, making collection of a judgment even harder.
A solid contract means little if the party on the other side can’t perform or pay. Contractors, subcontractors, and suppliers at least have tools to pursue unpaid amounts—mechanic’s liens, enforcement of payment bonds, and similar vehicles. In Maine, for example, most private projects are subject to mechanic’s liens, although some public projects are not. Owners, however, often have far less recourse.
Common mistakes in financial due diligence
Understanding the risk is one thing; knowing where parties most often fall short is another. In practice, the same patterns of oversight tend to surface repeatedly.
- Not checking the actual identity of the party you’re contracting with. I have seen many examples where a contractor, supplier, or a subcontractor signs an agreement with an entity that has a good reputation, only to find out later that the actual signatory was a thinly capitalized subsidiary or affiliate with a similar name. Check incorporation records online, search the registry of deeds in the county where the project is located and where the other party is based, and run a basic Google search for any history of disputes or defaults. The reality is that most contract parties don’t check any of this. That can be a costly mistake—and it’s easily avoidable.
- Making advance payments well ahead of progress or vice versa. If you’re an owner, do not make significant advance payments ahead of actual work completed. In Maine, where there is no bonding or licensure requirement for contractors, large advance payments or deposits carry real risk. Retainage—withholding a portion of payment until work is satisfactorily complete—is a standard and sensible tool for managing this exposure. If you’re a contractor, subcontractor, or supplier, you likewise should not significantly perform beyond what you have been paid or can safely lien or cover by a payment bond.
- Assuming, without confirming, that you have mechanic’s lien rights. Confirm that there is no disclaimer of lien rights in the registry of deeds and that your customer is not otherwise exempt. A quick call to legal counsel can pin this down.
- Not keeping track of bond requirements. If there is a payment bond in place, carefully track and meet the notice and claim deadlines required by the bond.
- Overlooking and over-relying on insurance. Adequate insurance coverage is essential for owners, general contractors, and subcontractors alike. Insist on certificates of insurance to confirm coverage. That said, insurance won’t respond to every financial risk. A standard commercial general liability policy, for example, protects against property damage or personal injury caused by defective work—it may not guarantee the quality of the work itself.
- Not considering other safeguards. General contractors should also consider subcontractor default insurance, a product underutilized in northern New England but worth evaluating on larger projects. And in some situations, requiring a personal guarantee from the principal of the contracting company can be an effective additional layer of protection.
Nurture your relationships—but don’t count on them
Relationships matter in this industry. Generals and subcontractors often have long track records with one another, and a shortfall on one project can sometimes be addressed through goodwill on the next. In my experience, construction folks are honest and want to do the right thing, but for most players it takes only one bad job to trigger a nightmare domino effect on other jobs, including yours. That’s why you can’t safely leave it to goodwill alone.
So, before you sign anything, don’t only ask, “what am I agreeing to?” Always also ask, “with whom am I agreeing?” And don’t just ask whether that party wants to do the right thing; ask whether it can do the right thing. And, as the job is unfolding, keep asking the same questions and protect yourself accordingly.
Bernstein Shur’s Construction Group helps developers, contractors, and construction professionals manage risk and keep projects on track at every stage of the project lifecycle. The group provides sophisticated legal solutions spanning contract negotiation, project administration, dispute avoidance, and litigation, drawing on deep experience in the construction industry. George Burns is a Senior Counsel who represents owners, contractors, and other construction participants on everything from hospitals and schools to infrastructure, energy, and large-scale residential projects. He can be reached at [email protected].