All in Agreement
I asked Hoffman what his personal opinion is on the "pay-if-paid" clauses included in today's subcontracts. Keep in mind that the "pay-if-paid" clause basically means that a general contractor is NOT obligated to pay a subcontractor unless the owner first pays the general contractor. Also keep in mind that Hoffman's company has never been involved in a legal action brought about by an owner in 110 years. In hearing his response, I was shocked. He says, "We believe it's our responsibility to verify the owners ability to pay, therefore our company does not use contracts that include ‘pay-if-paid' clauses."
Hoffman went on to say the AGC document committee has developed a "pay-if-paid" subcontract, as well as a subcontract, which does not require the owner to pay the GC prior to paying the subcontractor. He explained that each GC has to make a decision as to which subcontract form he will use.
The AGC, American Subcontractors Association and the Associated Specialty Contractors, have developed construction guidelines for all contractors. The guidelines can be accessed by anyone by going to the construction guidelines Web site at www.constructionguidelines.org.
In Section A.3, "Guideline on contractors payment rights, obligations and responsibilities," I found that the AGC, ASA and ASC all agree that GCs and subcontractors are responsible to, "understand payment terms and conditions, and confirm the owner's ability to pay for services provided." The guidelines go on to make it clear that the "GC is responsible to research the owner's ability to pay for the project and to convey such information promptly upon ‘request' to all members of the construction team at the outset and during the course of the project ..."
Most important is the last statement of the payment guidelines: "The person most responsible for prompt and complete payment is you. Protect yourself and your company. Understand and research the payment requirements of each individual project and the owner's ability to pay. It is not only your right but also a prerequisite for your success in the construction industry."
Guidelines for general contractor-subcontractor relationsI also looked at Section A.1, "Guideline for general contractor-subcontractor relations." One paragraph reads, "Ethical conduct, regardless of contractual ‘rights' or ability to make another firm suffer, is essential for harmony. The golden rule, ‘Do unto others as you would have others do unto you,' is still the best guideline in dealing with other individuals and businesses."
The guideline goes on to say that, "Prime contractors should make payment promptly and in just proportions to work done by subcontractor ... it is expected that the subcontractor will pay promptly for all its labor and material as far as executed."
Since the AGC, ASA and ASC developed and adopted these guidelines, it leads me to believe that these three organizations do not know what subcontractors really want. I believe I speak for every subcontractor when I say subcontractors do not want to sign "pay-if-paid" contracts.
I talked to Brian Cubbage who heads the Construction Law and Contracts Council for the ASA who says that although the AGC involves the ASA in the contract process, the ASA does not endorse any of the AGC subcontracts.
There may be other opinions as to how the "pay-if-paid" clause came into existence, however, Cubbage believes it began in the 1940s. He believes the language started during the construction of a '40s Worlds Fair. When subcontractors sued to collect their money the courts upheld that the "pay-if-paid" clause was legal and binding. Since that time, most GCs continue to shift payment risk to subcontractors.
The courts in New York and California have abolished the "pay-if-paid" clauses. In a California case, the court found, "Because California statutes specifically prohibited contract provision generally waiving the mechanic's lien right, and because these contracts accomplished that result by indirection, the court held the ‘pay-if-paid' provisions void as against the contractor. Since they were void, the contractor owed the money to the subcontractors, and consequently the surety by the terms of its agreement, was also liable."
Deborah Lawson is the executive director and lobbyist for the ASA in Florida. She explained there are three ways to change the "pay-if-paid" law in a state.
File suit challenging the language all the way to the State Supreme Court. This means having a test case-one where the subcontractor or supplier (or multiples) are not paid because of a "pay-if-paid" clause and one sues to collect. Obviously, the litigation approach is very expensive and time consuming but it is how "pay-if-paid" clauses became unconstitutional in California and New York.
Seek an amendment to state constitution. This could be by the legislature or ballot initiative, depending on the laws in the state governing amendments to its constitution.
Lobby to pass a statutory provision, which basically creates a new law.
In Florida, the ASA supports legislation filed this year that would make "pay-if-paid" clauses unenforceable. When asked about the costs of pursuing such an option in other states, Lawson says, "You should expect to pay an annual retainer somewhere in the neighborhood of $30,000 to $50,000 to hire a lobbyist to pass this type of legislation." Obviously, there is no guarantee the statute will pass. In states where the AGC has a strong and active legislative program, one can expect opposition to such a change. The stronger the opposition results in lengthier and more costly effort.
Lawson is not only smart she has spunk. She says GCs continue to push risk downstream to subcontractors, and do their very best not to assume any risk. This is just a part of the pattern of risk-shifting that has developed through the last 50 years as GCs have moved away from self-performing their contracts. She also points out that subcontractors continue to sign contracts with "pay-if-paid" language. Not until something bad happens do they wake up and realize that they're not going to get paid, and if the loss is big enough, then they're just out of business.
Lawson used a story example to explain GC mentality. "Once upon a time in the old days, GCs self performed most of their work. They hired people and had a lot of equipment. Then one day a GC came up with the idea of encouraging his employees to buy his equipment and go into business for themselves. Of course, the GC would still hire them to do the work but when the equipment broke it would be someone else's problem. This worked so well that the GC decided how nice it would be if he could get the subcontractors to insure and finance the GC. Retainage, bonding, indemnification and "pay-if-paid" clauses were born and everyone lived happily ever after-except for the subcontractor."
The "pay-if-paid" clause gives GCs the ability to do more work than they could otherwise afford to do, because they don't have to pay anyone unless the owner pays them. These days, the GC's money goes much farther than it did 50 years ago when the GC employed all the different trade workers and had to pay them each week as subcontractors do today.
It's lonely at the bottomI have to agree with Lawson when she says "today's contracts have become ridiculous, from a subcontractors position." Just because the AGC has a contract form that excludes the "pay-if-paid" clause, doesn't mean the AGC is going to support the ASA or subcontractors in general to have the this clause abolished, as it was in California.
It appears the AGC and the ASA will never agree and each organization continues to develop contracts and contract language, which if used, is intended to protect the interests of their membership. In writing this story, I've come to the conclusion that if a subcontractor is bound to a "pay-if-paid" clause, the risk associated with that clause should be sent downstream to sub-subcontractors and suppliers. This decision is based on the fact that GCs have down streamed all payment risk to subcontractors. Why shouldn't subcontractors do the same? Maybe, down streaming payment risk to suppliers will cause suppliers to down stream their payment risk to manufacturers. Once material manufacturers are impacted, I'm somewhat confident the "pay-if-paid" language could be abolished.
Until that happens, subcontractors can look for quality general contractors like Hoffman Corp. As Hoffman says, "We believe it's our responsibility to verify the owners ability to pay, therefore our company does not use contracts which include ‘pay-if-paid' clauses." A company that is willing to accept payment responsibility is difficult to find. As well, a company who is willing to accept responsibility should also receive the very best price and service. Is it possible that a key reason for Hoffman's success has to do with their willingness to accept these responsibilities?
The construction guidelines jointly developed by the AGC, ASA and ASC all agree that the best guideline to follow is the golden rule.
Finally, all contractors and suppliers can minimize their financial risks by using "pay-if-paid" clauses with their lower tier contractors and suppliers or they can work with GCs who don't include the "pay-if-paid" clause in their subcontracts.
If it's fair for subcontractors to accept payment risk, it should also be fair for suppliers and their manufacturers to do the same. Pass it on!
Remember: Teamwork begins with a fair contract!