New Contract Law Proposal
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Let’s start with the premise that there’s something missing in the payment equation, something which can be remedied by a change in our laws. The subcontractor is too far removed from…has no direct access to…the money which is meant to be his/hers. The bank has no ties with anyone but the borrower. The borrower/property owner has no ties with anyone but the G.C. And everyone, from the bank…to the borrower…to the G.C…profits from holding onto the money as long as they can. That’s the principal reason that the sub eats it so often. What I’m suggesting is a law which would recognize the financial interdependence of all those involved and require a more responsible, formal approach to funding timely payments to subs: 1. The property owner places the necessary funds in an escrow account. 2. That money is paid to the G.C. at many predetermined points of completion and inspection. 3. The G.C. would then be required to pay the sub before taking his profit from each payment. Most G.C.s recognize the importance of paying their subs promptly. That’s how they keep the wheels of cooperative commerce in motion. But their are so many opportunities for power plays; between the bank, the property owner, the G.C. and the subs, that the little guy often ends up holding the bag, with little or no direct recourse to getting paid. |
Replies
"1. The property owner places the necessary funds in an escrow account."
If I'm having a $1M home built you expect me to put that much money in an escrow account? Pay interest on it? I don't think I'll find a lender to do that. As I understand it, banks will pay draws.
"2. That money is paid to the G.C. at many predetermined points of completion and inspection."
aren't these draws, and because the GC gets the money, doesn't mean the subs will
"3. The G.C. would then be required to pay the sub before taking his profit from each payment."
I don't know when a GC gets their profit, but if it incremental, what makes you think they'll go without profit till the end?
how would this new law apply to sub-subs and to suppliers. they can be screwed as well as a sub.
"The subcontractor is too far removed from...has no direct access to...the money which is meant to be his/hers."
there is no contractual relationship between the subs and the main contractee. the sub's money is owed by the GC, the contract between the GC and the sub should spell out the payment schedule.
"Let's start with the premise that there's something missing in the payment equation"
IMO what's missing is the sub being sure there is a payment schedule in their contract. That the sub can control.
bobl Volo, non valeo
Baloney detecter WFR
"But when you're a kibbutzer and have no responsibility to decide the facts and apply the law, you can reach any conclusion you want because it doesn't matter." SHG
It'a PROPOSAL, one which suggests remedies for long standing problems. Of course the power brokers will object to any change in the status quo. Holding onto the money is one of their primary means to earn income. The rest of us have to actually learn some skills, then go out and apply them before we are allowed ask them for our daily bread.
So we write the law to make the escrow accounts interest bearing...for the depositor. Or we write it to act like a line of credit account tied directly to the escrow account. The the borrower pays no interest until the payment has been made.
The main point is to get payments made rapidly while respecting and protecting everyone's interests, equally.
"The main point is to get payments made rapidly while respecting and protecting everyone's interests, equally."but how does this proposal do that?
how are the sub-subs and suppliers protected?How are the traditional contract relationships kept? Sounds like you want to change the whole structure of contracting relationships.If you want to make a proposal to change things you need to be prepared to dot all the "i's" and cross all the "t"s".Don't forget that part of the problem you're trying to solve includes the HO/property owner possibly having to pay twice for the same thing.
bobl Volo, non valeo
Baloney detecter WFR
"But when you're a kibbutzer and have no responsibility to decide the facts and apply the law, you can reach any conclusion you want because it doesn't matter." SHG
That kind of sounds as if you are suggesting a sort of "ombudsman" situation, with all of the parties declared in advance, thus allowing, if needed, some sort of audit/reporting feature.
As bobl points out, there are few systems that cannot be stymied by the deliberate intent of just one party in the process. No good cure for low-lifes, sadly.
As a homeowner, I'd say no way. If I hire a GC to take care of things I only want to have to deal with the GC.
As a lawyer, I'd say, if you can get all parties involved to agree to this approach and document it in a contract, more power to you. But if you intend to mandate an entirely new bureaucracy to deal with funding of construction contracts and completely upend the principles of freedom of contract, I'd say again, no way.
<<As a homeowner, I'd say no way. If I hire a GC to take care of things I only want to have to deal with the GC.>>
Thanks for your response. It will help me to clarify a few points.
The homeowner would only deal with the G.C. No change in that relationship.
What I'm proposing is to formalize the financial side of existing relationships, legally and contracturally. Very much the same as the real estate business, the money would be held and paid out by a bonded escrow company. Perhaps it would work well if the escrow company were to employ bonded inspectors to confirm completion of phases of work.
The reason behind the proposal is to keep the money flowing, uninterrupted, to all deserving parties, in a timely and predictable way which reflects the respect which is part of any contractual relationship.
That sounds just like setting up an escrow account with a title company. Pay request forms get filled out, reviewed by the Architect (approved or partially approved), reviewed by the Owner, sent to the title company, they check that the i's are dotted and the ts are crossed, subs show up at the title company with their waivers,and payment is made to each sub. Even though the Owner has and agreement with the GC, it can happen this way if the two parties, Owner and GC, agree to it. However, many subs don't want to drive to the title company to pick up a check. They'll hem and haw, the GC sometimes will try to strike a deal with the owner to avoid the title company. However, using this method is the best way to make sure waivers are in and the subs are all paid.
Joe,
Thanks for your enlightening reply.
I'm glad to hear that such agreements are often done. Or maybe it's when the job requires an architect. I've never seen this kind of contract on any of the smaller jobs I've worked on, with or without professional designers.
But you say that they subs don't want to be troubled to drive to someone's office to pick up their checks? this sounds like the same old class war to me. The guys on top accuse the underlings of being ignnorant malcontents or cry babies. Sorry, I'm not buying that one. Our business works best when everyone recognizes the significance of each others' contributions to the product.
If the escrow company knows it's business, it can get the money into the sub's account easily enough, without him having to drive to their office to pick up a check. That should be their contribution to harmonious relations in the building business.
"That sounds just like setting up an escrow account with a title company. Pay request forms get filled out, reviewed by the Architect (approved or partially approved), reviewed by the Owner, sent to the title company, they check that the i's are dotted and the ts are crossed, subs show up at the title company with their waivers,and payment is made to each sub."what does this add to the cost?
bobl Volo, non valeo
Baloney detecter WFR
"But when you're a kibbutzer and have no responsibility to decide the facts and apply the law, you can reach any conclusion you want because it doesn't matter." SHG
From my side as the architect, I put in a little extra time and money for reviewing the paperwork. I typically do site site observation in my agreement with the homeowner so I'm usually familiar with the progress of the construction.
As for the title company, I believe they charge a percentage. The GCs usually have a title company that they've worked with and so they and the homeowner take care of the arrangements of setting that up.
thanks
bobl Volo, non valeo
Baloney detecter WFR
"But when you're a kibbutzer and have no responsibility to decide the facts and apply the law, you can reach any conclusion you want because it doesn't matter." SHG
Why re-invent the wheel? What if the following tried and true approach is used:
Hire only licensed contractors and subs.
Use a contract reviewed and approved by a construction lawer.
Use the lien laws as needed.
"Put your creed in your deed." Emerson
"When asked if you can do something, tell'em "Why certainly I can", then get busy and find a way to do it." T. Roosevelt
<<
<<Use the lien laws as needed.>>
If that's working for you, excellent. Happy to hear it.
Some guys can't afford to wait for the day when the lien will pay off. That's the main reason I'm proposing a change.
The lien will generally be paid off 90 days after you record it, because the property owner and the bank will freak out if it becomes an actual lien on the property, getting ahead of the bank's disbursements. It will be a condition of default for the bank as against the developer and owner, and the whole deal turns into a pumkin on the 90th day here. Once a guy records a lien, the bank refuses to make more disbursements, may commence a real estate foreclosure, bringing the project to a screaming halt, all the time interest is accruing. A mechanic's lien in the hands of a sub is a dangerous weapon. There is a provision in California law which requires the owner/developer to put up a bond equivalent to the construction costs in projects over $1million.I think 90 days is pretty soon. You, as a subcontractor, can always contract on any terms you want--half down, half on completion or even a letter of credit. Nothing is stopping you from requiring that on larger jobs with flakey owners.Regards, Scooter"I may be drunk, but you're crazy, and I'll be sober tomorrow." WC Fields, "Its a Gift" 1934
Would that California law prevailed in the other 49. Thanks for the tutorial.
Some guys can't afford to wait for the day when the lien will pay off
Too true.
Want a couple? I, and 17 others each own a share of a slab in Traviz County that's only ever had the one house burn down on it . . . make ya' a real deal on it <g>.
Have another in probate, and one more in a second divorce settlement, on hold pending the AG's determination of whether his office gets precedent to pay delinquent child support payments (which case will likely wind up in the TX S.C., and only the barristers will profit, sorta).Occupational hazard of my occupation not being around (sorry Bubba)
At least in California, once the lien becomes seasoned, after 90 days, and after the sub has sued to make it judgment lien, to which there are darn few defenses, the subcontractor has the right to sell the property. So that could occur as early as 90-120 after contract completion.Regards, Scooter"I may be drunk, but you're crazy, and I'll be sober tomorrow." WC Fields, "Its a Gift" 1934
the subcontractor has the right to sell the property
Yeah, now if the 18 of us could just find a buyer <sigh> . . . Occupational hazard of my occupation not being around (sorry Bubba)
I'll give $100."Put your creed in your deed." Emerson
"When asked if you can do something, tell'em "Why certainly I can", then get busy and find a way to do it." T. Roosevelt
I'll give $100
The plumber might take you up on that one <g>
At least from the griping about how "we" now get to pay the property tax on this female dog (and cc every document to the fire insurance company; which then needs a dupe to go to the Sheriff for the arson investigation file . . . )Occupational hazard of my occupation not being around (sorry Bubba)
Here its sold in a foreclosure sale to the highest bidder. Generally the Mechanic's Lien will enjoy priority over the construction financing, so which is my point, the Bank will bail the sub out 90% of the time.If the project is a leashold, the property owners will bail out the sub 90% of the time, and simply evict the tenant and glom onto the fixtures. Sweet deal for him.It just seems to me that if you aren't being paid, you aren't doing things right in terms of your contract, picking a good General Contractor, getting bonds in place and filing liens and then foreclosing on those liens.I can't believe that the law is much different in other states.Regards, Scooter"I may be drunk, but you're crazy, and I'll be sober tomorrow." WC Fields, "Its a Gift" 1934
Here its sold in a foreclosure sale to the highest bidder
Well, here at Year 11 of the arson saga, we are only getting to the point where enough Clerks of Court have dotted t's and crossed i's to get this bird released.
The three years we were on hold for the banking "issues" were bad enough (HO had his very own Thrift, it seems; said institution papering a goodly bit of Travis County).
I walked on this snake-bit mess after the first check bounced the second time, so, really, I'm only $1100 "deep" in this mess, and maybe another $500 in filing fees and travel for depositions. Not like the plumber, or the framer . . . Occupational hazard of my occupation not being around (sorry Bubba)
Two solutions, both in play in every project.
Mechanic's Liens; and
Performance Bonds.
Existing system works fine.
Regards,
Scooter
"I may be drunk, but you're crazy, and I'll be sober tomorrow." WC Fields, "Its a Gift" 1934
Scooter, I'm glad to hear that you're getting paid on time. And maybe the way the laws work in California is what some other states need.
I'd just like each sub to be able to get paid in time to make his payroll and pay his suppliers...so he can stay in business and exercise his other rights...life, liberty and the pursuit of happiness...like that.
"Ah...what symetrical digits." W.C. Fields "My Little Chickadee"
Sounds like a great idea to me. Make a law and when they break it you can spend years in court... once again trying to get your money.
You need to pick better GC's, cut a better deal and know when to walk away.