Timing Is Everything
It is axiomatic in the construction industry that the timing of a project can have a huge impact on its potential for success, failure or dispute. The impact of the current residential market on mortgage brokers, lenders and the residential construction industry is self-evident. Those economic trends appear to be causing a cascade of effects into other related industries and financial sectors.
These trends highlight the need to understand the timing of business cycles and the timing of remedies. A good grasp of these issues can inform subcontractors in evaluating and reducing risk as well as maximizing the effectiveness of available remedies.
Tightening of credit and increased financial shakiness can cause more direct triggers into litigation. For example, an owner having trouble with cash flow slows down payments on their jobs. This hurts the cash flow of not only the general contractor, but also all the subcontractors and suppliers. These disruptions in cash flow from one job can infect the viability of other unrelated projects. Cash flow issues with generals and subcontractors can cause similar cascading impacts. Serious breaches in payment obligations because of cash flow problems can obviously lead directly to litigation. Finally, financial pressures can lead to increasingly desperate assertions of less than reasonable positions during the project.
Cash flow problems also cause an indirect increase in the likelihood of litigation on a project. Cash flow disruption can lead to problems keeping quality subcontractors or suppliers on site. Similarly, companies facing cash issues may have difficulty staffing a project or maintaining quality control. These issues can directly impact the performance in the field and, thus, increase the chances of litigation.
Mechanics' lien claims are particularly powerful as they allow you to claim remedies directly against the underlying project rather than a general contractor who may have financial issues. In particular, the timing of lien claims may permit you to take advantage of an owner's upstream requirements to refinance or face huge balloon payments. This is particularly true in a residential context in which temporary construction financing may be in place that needs to be replaced with permanent financing. I have had several cases from which clients recovered all of their owed funds, plus costs and attorney's fees, due to the timing of liens compared to financing requirements.
Similarly, timing and tone of assertion of bond claims can create a great deal of leverage. Contractors who are in a weakening position may feel particularly threatened by bond claims. Serial claims against bonding companies may result in the bonding company dramatically reducing or even eliminating bonding capacity. Depending on the market involved, a reduced bonding capacity may impact a contractor's ability to bid on and obtain profitable work. Understanding the context of bonding capacity can assist in evaluating, if and when to raise a bond claim against a general contractor as opposed to the more traditional route of claiming a breach of contract. Naturally, the leverage of bond claims can work in both directions if you are bonded.
About the Author
Tim Hughes is Of Counsel to the law firm of Bean, Kinney & Korman in Arlington, Va. He can be reached by email at firstname.lastname@example.org or by phone at 703-671-8200.