February 10, 2022

By: Philip E. Beck Partner, Smith, Currie & Hancock LLP.

ConsensusDocs recently presented a timely webinar entitled “Managing Subcontractor Default, Bankruptcy, and Owner Insolvency in a Recovering Post Covid-19 Construction Economy.” This webinar, moderated by Phil Beck, a partner in the law firm Smith, Currie & Hancock LLP, highlighted a number of key steps construction professionals can proactively take to protect themselves and their projects’ success in the current construction market. 

While it may seem counterintuitive, history suggests that many subcontractors, suppliers, and owners/developers are most vulnerable in a recovering economy. Current supply chain problems, unusual and unpredictable cost escalation, labor shortages, and other current market conditions further exacerbate the increased risk of subcontractor defaults and bankruptcies and owner insolvency.

Phil and the webinar panelists (Rachel Walsh or Liberty Mutual Surety; Marshall Kent of Fox Rothschild, LLP; and Brian Perlberg of ConsensusDocs) alerted the attendees to the challenges they should be aware of and provided some practical advice for mitigating and managing these risks, including guidance concerning: preemptive measures contractors can and should take pre-contract, early warning signs to watch for, steps to take if a subcontractor or supplier appears to be in distress, how a contractor can guard itself against owner insolvency, the role of bonds and insurance as tools for managing these risks, what bankruptcy looks like, and how bankruptcy or default impacts an ongoing project.

One of the key things a contractor can do to protect itself, its project, and its bottom line is to keep itself well informed as to the financial condition of all major project participants and to ensure that the necessary project funding is, and remains, in place. In order to ensure its right to so, including appropriate language in the contractor’s various contracts is critical.

ConsensusDocs standard agreements such as the ConsensusDocs 200 prime agreement allow a builder to request and receive project financial information before construction begins as well as during construction. Owners may wonder what kind of questions might be asked of them. ConsensusDocs, which is a Coalition of more than 40 construction organizations that includes Owner organizations, publishes the industry’s only standard financial questionnaire, the ConsensusDocs 290.1 Owner Financial Questionnaire. The questionnaire provides guidelines and reasonable questions about project financing. Receiving timely information regarding project financing is critical to builders’ financial viability. The payment flow is the lifeblood of a General Contractor. General Contractors are more likely to go bankrupt as a result of not receiving payment on work performed than as a result of a lack of work.

The American Institute of Architects (AIA) also publishes standard contract documents, but the 2017 edition of the AIA A201 General Conditions Document restricts access to financial information once the project commences – even more so than in prior editions of the A201. Under the current AIA A201, the default date for defining “project commencement” is the date of contract signing, which means the right to obtain project financial information may be restricted before dirt is even moved. Thereafter, a builder must provide a reason for the request and the architect determines if the request is reasonable. AIA does not provide examples of reasonable questions to ask owners about project financial information. It is also unclear about the consequences for not receiving reasonably requested information.

A construction team is only as strong as its weakest link; and, like a tug-of-war team, the downfall of one team member can bring down the whole team. Therefore, it is vital that contractors not only keep a close watch on their own finances, but that they keep vigil over the financial condition of other key project participants as well.

Smith Currie provides comprehensive legal services to all parts of the construction industry across the nation. Smith Currie lawyers have decades of demonstrated success representing construction and federal government contracting clients “From the Ground Up,” including procurement matters, contract formation and negotiation, project administration, claims prosecution and, when necessary, in litigation and other forms of dispute resolution.

The  views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.