Payment Incentives

A subcontractor called complaining that although the contractors his company worked for were usually on time with progress payments, final payment after completion of the work is often an entirely different story.

That sounded vaguely familiar. Naturally, there is very little that can be done with a contractor who won’t or can’t pay, except go through the delays and expenses of litigation or, if the contract provides, arbitration.

However, there is some preventative medicine that I would call the “poison pills” of construction credit management-interest and attorneys’ fees.

Many unscrupulous contractors (or owners) who do not make final payments to contractors without a fuss, delay payments for a number of reasons, including:

(1) they don’t have the money and don’t want to borrow it and pay bank rate interest which may be higher than the legal rate of interest recoverable in a subcontractor lawsuit;

(2) they simply want to delay payment and keep the sub’s money as long as possible, knowing that it could take a long time to go through trial; or

(3) they are just bad people.

However, if contractors with any of those attitudes are faced with contract requirements that they pay interest at higher than bank rates and that they will be required to pay their opponent’s attorneys’ fees as well, they may have greater incentive to pay. Without those contract provisions they would get away with lower legal rates of interest and payment of only their own attorney’s fees if they are sued.

Prescription: Add higher interest rates and attorney’s fee clauses to your contracts. If the other party balks at those provisions, ask if they intend to pay on time. If the answer is “yes,” tell them the provisions make no difference. If the answer is “no” – find another job.