Selecting A Pig in a Poke

Pandemic times have created a new problem for many contractors. The subs they know and trust aren’t taking on more work. That can be both bad and good. I’ll explain.

Many residential contractors negotiate their sub-trade work. They do just fine using the same subs on job after job -- seldom putting work out to bid and usually starting without a formal contract. They’re comfortable using a small number of specialists, trust them to do nothing but first-class work and are perfectly content with the prices they charge. This is construction contracting based on trust and mutual respect – as it should be. Unfortunately, COVID-19 has trashed many of these close relationships.

When your favorite subs won’t bid, the only option is to expand the pool of prospects. The down-side is that trying a new sub is like selecting a pig in a poke. So many questions:

• Can they do the work?
• Are their prices fair?
• Will they work well with our other tradesmen?
• Will their schedule fit my schedule?
• Are they good at call-backs?

Almost essential when trying any new sub: A written contract. More on that later.

Now the up-side

Open bidding nearly always attracts more prospects. The more bidders, the lower the contract price. The lower the contract price, the greater the risk of sub-standard results. Your task is finding the best balance between cost and risk.

On public works projects, state and federal law usually require that bid competitions be open to everyone qualified. There’s no such requirement on private jobs. You can award the job on any grounds you select. There’s a spectrum of choices:

• Negotiate with a single sub at your “usual” price.
• Ask for bids from a selected list of subs.
• Open bidding to any sub qualified to do the work.

If you decide to open competitive bidding, it’s good practice to screen prospects early in the process. Don’t solicit a bid from a sub obviously unqualified to take on the work – regardless of the price. Select subs the same way you select any professional –- by reputation and recommendations from satisfied clients.

The fact that you’re asking for bids on a project doesn’t necessarily mean you’ve ruled out awarding the contract on a time and materials (cost plus) basis. Even T&M contracts can be awarded to the lowest responsible bidder. If your choice is T&M, ask for bids based on the sub’s hourly labor rates, markup and, perhaps, a guaranteed maximum price.

Any time you’re dealing with new subs, get a written agreement. Nothing heads off misunderstandings better than a good subcontract -- especially important in new business relationships. Every sub has a unique set of norms and expectations. Be sure that what the new sub expects is aligned with your way of doing business. The best source I know for subcontracts is Construction Contract Writer. The trial version is free.

No matter how you select a subcontractor, there’s an easy way to check the new sub’s charges. National Estimator Cloud has thousands of labor and material cost estimates for nearly all construction trades – well-organized, well-indexed, up to date and available on the Cloud anywhere you need a price. The cost is only a few dollars a month and you can quit at any time.

Pay-If-Paid in 50 States

Subs and suppliers expect to be paid on time. That’s a problem when an owner is slow to pay the prime contractor. So what are you supposed to do about slow-pay? The obvious answer is a “pay-if-paid” clause in your subcontracts. With “pay-if-paid,” a prime contractor doesn’t have to pay subs until paid by the owner. That’s legal in about half of all states. If you’ve never used a “pay-if-paid” contract clause, keep reading. There’s a lot to learn.

True “Pay-If-Paid”

“Pay-if-paid” comes in two flavors. True “pay-if-paid” means the prime contractor never has to pay a sub if the owner never pays the prime. Of course, subs and suppliers can still use the lien law to collect from the owner. But the prime contractor has no obligation to pay subs until the owner pays. That works in 24 states: AL, AR, AZ, CO, CT, DC, FL, GA, ID, KS, LA, MD, MI, MO, NE, NH, NJ, OH, OR, PA, RI, TX, VA, and WV. True “pay-if-paid” requires very specific contract language, such as:

Contractor may withhold payment for work done by Subcontractor (including retainage) until Contractor has been paid for that work by Owner. Payment by Owner is a condition precedent to payment of Subcontractor for work completed. Subcontractor acknowledges reliance on the credit of Owner for payment, not the credit of Contractor.

In those 24 states, a true “pay-if-paid” contract usually won’t affect lien rights. Subs can still file a lien and collect in full from the owner. If the job is covered by a payment bond, a “pay-if-paid” contract may relieve the surety from liability on the bond. But be careful. A prime contractor who settles with an owner by compromising the claim of a subcontractor may have to pay the sub in full in spite of the “pay-if-paid” agreement.

“Pay-When-Paid”

When a “pay-if-paid” clause isn’t absolutely clear about the owner’s payment being a condition precedent, courts in those 24 states will consider it a “pay-when-paid” contract. That’s the second flavor. “Pay-when-paid” means the prime contractor still has an obligation to pay subs – eventually. As long as the prime contractor is trying to collect, the subs have to wait. But the prime remains liable to subs for what’s due.

Seven states void “pay-if-pay” agreements but permit “pay-when-paid” contracts: DE, IL, IN, KY, MA, SC, WI. If you like “pay-when-paid,” here’s a typical contract clause:

Contractor will not unreasonably withhold payment to Subcontractor for Work done by Subcontractor once Contractor has been paid by Owner for that Work.

Both “pay-if-paid” and “pay-when-paid” clauses are void in four states: CA, NC, NV, and NY. In those states, the prime contractor has to pay subs when due, even if not yet paid by the owner.

And the other 16 states? It’s too soon to be sure. No court in those states has been asked to decide the issue and the state legislatures have not spoken. 

Caution. This is a capsule summary. There are exceptions. For example, rules for payment can vary with the type of construction (res or non-res), the owner (public or private) and the value of the work. My suggestion: Be sure your contracts are going to work the way you expect. Construction Contract Writer makes that easy, no matter where you live and work. The trial version is free.