In the last article I dealt with the “paid when and/or if paid” clause, which is in almost every subcontract. This month I want to look at the subtle ways that general contractors try to get control of your business. Sometimes it's in the form of wanting to make direct payments to your suppliers or sub-subcontractors, and/or it might be a blatant demand to audit your books.
The first item can be written in several different ways. Typically, it comes to the subcontractor in language similar to this, “The subcontractor agrees that the GC may pay any and all persons which have not been paid the monies due them, whether or not a claim has been filed or not, and the subcontractor shall reimburse said amounts to the GC upon demand.”
Or it could say, “The GC may withhold amounts otherwise due under this master agreement or any other contractual arrangements between the parties to cover the GC's reasonable estimated costs or liability the GC may incur for which the subcontractor may be responsible, determined solely by the GC.”
First of all, the GC needs to know for sure and be able to prove any “cost or liability” before withholding anything. Just estimating the amounts before absolutely knowing is unacceptable. Further, “costs or liability that the GC may have incurred” is too ambiguous and is also unacceptable.
However, you can accept a statement that says, “Appropriate adjustments of withholdings shall be made when the exact amounts owed are determined, by both parties.” You don't want to give the GC sole authority to do anything. The reason is simple. The GC has a vested interested in that judgment, and his view will be one sided.
The term “joint checks” sounds fair on the surface; however, it can be a problem. Generally, the subcontract will be written something like this, “The general contractor may, at his own sole discretion, make checks payable jointly to the subcontractor and the supplier or sub-subcontractor, or he may even pay directly the supplier or subcontractor the account of a claim by those suppliers or sub-subcontractors.”
Joint checks are fine as long as you and the GC agree on them and you both believe that you actually owe the money. Each situation needs to be determined on its own merits. The policy should always be that you pay your own bills. That's one of the ways that you are able to build a good reputation in the industry.
What happens if the GC has been contacted by a supplier that claims you owe him, but you are disputing the claim? For the GC or anyone else to arbitrarily pay a bill indiscriminately out of funds that are due your firm, simply because they say that you owe them, is unfair and a poor business practice.
If the GC has all of the control of the funds and he decides (at his own sole discretion) to pay the supplier, then he has taken away any leverage you may have to settle that matter with the supplier. Do not agree to this arrangement. You should never mind showing proof of payment; however, to give someone a blank check to pay any bill he chooses is out of the question.
Payment and performance bonds are not typically a part of the contract. However, if you choose to bond a project, you can do that. Just make sure that you are reimbursed for the cost.