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True Horror Story, by Corinne Maddox, CCM, CFM

After months into construction of a small retail building and little visible progress, the owner began receiving calls from his general contractor's (GC) subcontractors indicating that they had not been paid. After weeks of stalling by the GC, the owner learned the GC had used his payments to pay the expenses of a different project. To make matters worse, the GC had actually completed far less work than was indicated on his invoices. The GC eventually abandoned the job, and subs filed liens and claims against the owner. The owner sued the GC, incurring tens of thousands of dollars in legal fees. In the end, the owner was forced to pay all subs, suppliers and legal fees, and was not able to recover the money owed by the GC. This story is not that uncommon. Some ways this could have been prevented are:
  • Check GC's credit references and your construction industry contacts.
  • Make sure subcontractors are reputable and have worked recently for GC. (Good subs avoid a GC who pays poorly.)
  • Under no circumstances should you pay for more work than is actually completed.
  • Carefully review GC's invoices. Be sure invoice backup references YOUR project.
  • Require a partial lien waiver with each invoice, including a statement certifying that previous payment was used to pay subs and suppliers for associated work.
  • Watch for signs of problems, i.e. GC submitted an unusually low bid (may indicate a desperate attempt to stay afloat); subcontractor awards are slow or change suddenly (may indicate GC is having trouble finding subs willing to work for him); submittals or materials are late; subs abandon the job; or GC's other jobs are having problems.
  • If necessary, require a Payment Bond or issue joint checks to GC and subs.

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