Owners and general contractors must be extra careful in this economy

It is no secret that the construction industry is feeling the strains of the tight credit market. While everyone is talking about projects being canceled due to the lack of funding, there are other impacts on the construction industry due to the slowdown of new projects. One of the casualties of a decrease in new construction projects is the lack of cash flow to general contractors and subcontractors. Such a decrease in cash flow many times results in a spike in the amount of claims for non-payment and failure to complete. In the case of general contractors, they usually have many projects under contract at any given time. Hopefully, the general contractor earns a profit on each of those projects. However, there are times when a general contractor suffers a negative cash flow from a project and must choose to either use its own funds to cover the negative cash flow, use funds from other ongoing projects, or abandon a project altogether. This negative cash flow can come as a result of a loss on a completed project, an ongoing project which is behind schedule, or an ongoing project for which the general contractor underbid the cost of the work. If the general contractor decides to infuse capital into a money losing contract, then the chance of a claim arising is significantly reduced. However, when the general contractor decides to use funds from one project to cover costs on another, or simply abandon a project, you can be assured that a plethora of claims will arise. First and foremost, once a general contractor starts using funds from one project to cover the costs of another when there is a lack of new projects to generate positive cash flow, there is a high probability that the contractor will end up without enough cash to pay all costs for all of its contracts. At that point, the general contractor will not be able to pay its subcontractors on those projects where the contractor took the money to pay the costs of the previous contracts. Once that contractor fails to pay subcontractors, owners will be faced with mechanic's liens and other claims by subcontractors. In addition, using funds from one project to pay the costs on another is illegal under both civil and criminal laws. In addition to the mechanic's liens and claims by subcontractors that will arise when the general contractor does not have the cash flow to pay its debts from previous projects due to the lack of new work, owners will be faced with the abandonment of contracts by general contractors. Without the cash from the next project to pay the subcontractors on other ongoing projects, the subcontractors will stop performing their work which will cause the general contractor to breach its contract with the owner. The general contractor will leave the owner with an incomplete project and claims by subcontractors despite the fact that the owner has paid the general contractor the funds which should have been paid over to the subcontractors. General contractors must also be careful of defaults by subcontractors and non-payment by subcontractors to laborers and to union fringe benefit funds. When there is a lack of cash flow due to the lack of new projects, some subcontractors decide to close up shop rather than pay wages and union fringe benefits. In those instances, the general contractor may be held liable for the wages due the workers despite the fact that the general contractor paid the subcontractor all amounts due under the subcontract. In sum, owners and general contractors must be extra careful in this economy in making sure that each person or company performing work at the project is getting paid. While it is easier said than done, owners and general contractors must take extra precautions in policing payments in order to minimize claims. Andrew Richards, Esq., is a partner for Kaufman Dolowich & Voluck, LLP, Woodbury, N.Y.