The well runs dry
By Chris Thompson
A contractor
filing for bankruptcy or pulling out of a project and leaving
its partners in the lurch can be just as devastating to a business
as any accident.
Doris
Rauch, office manager for Con-Cor Co. Inc. in Menomonee Falls,
said her company has often felt the financial sting from contractors
backing out of projects or failing to pay for services. She said
Con-Cor most recently took a hit from ECES Services Inc. in Mequon
when the sewer and roadwork company left them hanging for about
$7,000.
"We
worked for ECES on several jobs, and while they paid us for some,
they owed us several thousand dollars," she said. "The
owner wrote a check for half of what he owed and said we would
have the rest within a week.
I never saw or heard from him again, and then I found out he
went bankrupt. It made us very angry."
Rauch
said as soon as she heard ECES Services went bankrupt, she initiated
the collection process, but there are no guarantees Con-Cor will
ever see the $7,000.
"When
we hear there is a possibility the company will go bankrupt we
immediately hire a collection agency, and we usually retrieve
a portion of the money," she said. "If you're a subcontractor
for home builders and you're a small company that relies on this
money for materials, you would go out of business from something
like this. We're a little bigger, but it's still not good."
Con-Cor
has learned through years of experience to use every resource
possible to check on a new contractor before doing business,
Rauch said. The company uses its collection agency to check contractors'
credit histories, and Rauch checks references, but even with
careful research it's easy to trust the wrong people.
"We
were leery about ECES immediately, but the first time we worked
for him, he paid us," she said. "We got burned three
or four years ago, and it was really bad because the contractor
was working on an Ameritech job and you would expect to get paid
on a job like that. But it's all part of the business. It's a
matter of doing your homework before and making sure the contractor
will pay you."
Donald
J. Croysdale, executive director of the American Subcontractors
Association of Greater Milwaukee, said public projects provide
more insurance for contractors and subcontractors through state-required
payment and performance bonds. The performance bond is designed
to protect the owner so if the general contractor does not perform
as specified, the owner can go to the bond company to make a
claim. The bond company then provides the necessary funds to
ensure the project is completed to specifications by somebody
else.
The City
of Milwaukee found itself in that exact situation last year when
ECES Services backed out of six roadwork contracts with the city,
Thomas R. Rowe, the city's supervisor of engineering, said.
"They
started getting behind and then they stopped communicating with
us when the projects ranged from near completion to half done
to not even begun," he said. "There was resurfacing
of roadways where trenches had been cut and left open longer
than normal, but with the bonds we were able to complete the
work with just small delays."
Limiting the
risk
Rowe said
it is very rare - only once or twice a year - that a general
contractor backs out of a project with the city. He said ECES
Services was a newcomer to the city's stable of solid, reliable
contractors.
"If
a prime contractor takes a hike, doing business gets difficult,
particularly if it's in the public arena," he said. "ECES
just dropped out of sight. We sent several registered letters
and didn't get a reply. We interview these companies so we are
comfortable they can handle the job, but we don't delve deeply
into their histories."
The payment
bond, Croysdale said, is a guarantee that if the general contractor
does not pay for properly performed work, because of bankruptcy
or any other reason, the subcontractors can make a claim to the
bonding company for payment. The bonding company, he said, then
aggressively seeks restitution from the general contractor.
"The
cost of bonding is usually a half a percent of the cost of the
project, and if you are bonded, you will have more knowledgeable
contractors," he said. "If you want the best contractors
giving the best price, you want the project bonded. Quite a lot
of general contractors know the value of performance and payment
bonds for the peace of mind they give to subcontractors and owners."
The majority
of private projects are not bonded, so subcontractors need to
take other steps to ensure they are compensated. Options include
joining the subcontractors' association to share information
about other general contractors or owners, confirming the financial
stability of projects before signing on and requiring credit
information from potential employers.
"You
need to do your due diligence or you increase your risk,"
Croysdale said. "If you don't do the leg work, you need
to limit the number of general contractors you work with to those
you know."
Exercising
lien rights is the last, best chance at recouping payment in
bad situations, and he said subcontractors must make sure their
contracts do not force them to relinquish those rights. It is
unconstitutional in Wisconsin to force subcontractors to waive
their lien rights.
Jockeying for
payment
Jeff Stacy,
president of Seater Construction Co. Inc. in Racine, said the
best way to avoid losing money is to slow down progress payments
to ensure the money is going to the right place. His said his
company has had only one experience with a contractor in financial
trouble, but once was enough.
"A
general contractor started to have money problems, and it was
awful and ugly because you feel for the person, but you have
to jockey for the interests of the owners and subs," he
said. "It's awkward to take a position where you are withholding
payment."
Stacy
said it's difficult to see a contractor in financial stress,
but he won't pay ahead of schedule for fear the contractor won't
fulfill its financial obligations.
"You
have to put the whole process under a microscope," he said.
"No matter how much people complain about expediting early
payment, you simply can't do it. As disgruntled as people get,
you have to make sure everybody is equally protected. If a contractor
is suspicious to begin with, you can always ask for a bond."
Kim Hurtado,
a Brookfield attorney who practices exclusively in the areas
of construction and project development law, said successful
relationships between contractors, subcontractors and suppliers
are based on open communication, relying on instincts, establishing
reliable paperwork right from the beginning, investigating any
problems that arise by consulting other contractors on the project
and taking swift action when it seems unavoidable that a contractor
is headed for bankruptcy.
She said
when it comes to collecting money, it's important to update payment
plans every six months. If a problem is obvious, invite the debtors
to a neutral ground to discuss payment plans and to determine
if they are "robbing Peter to pay Paul."
"Communication
is the most important tool you have to ward off flushing a contractor
down the toilet or knowing if it is coming," she said. "But
if you smell bankruptcy, you must move swiftly and have good
records from the beginning."
There
also are a variety of tools available to contractors to ensure
they don't take financial hits from unreliable subcontractors,
Teresa Mueller, general counsel to the Associated General Contractors
of Wisconsin, said. In addition to bonds, financial statements
and references, contractors can garner guarantees from parent
or holding companies, increase percentages of retained payments
to subcontractors or establish "terminate for convenience"
clauses, which allow contractors to cut off contracts with subcontractors
for any number of reasons.
There
are plenty of tools available to contractors to ensure don't
take financial hits from unreliable subcontractors. In addition
to bonds, financial statements and references, contractors can
garner guarantees from parent or holding companies, increase
percentages of retained payments to subcontractors or establish
"terminate for convenience" clauses, which allow contractors
to cut off contracts with subcontractors for any number of reasons.
Peter
Vogel, president of Vogel Brothers Building Co. in Madison, said
his construction company also checks with subcontractors' vendors,
monitors progress, and writes joint checks to subcontractors
and their vendors to make sure the payments go where they should.
But in the end, he said, it all comes down to developing working
relationships in which each person on the project can have faith
in the others.
"There
is a lot of trust between people in any business, and you want
to have a project team with people working toward the same goals,"
Vogel said. "As one works into a new marketplace, it becomes
necessary to do your due diligence, but the need for trust between
everyone is kind of a no-brainer."
