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November 2010: Legal Issues

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Legal Issues

It is not uncommon for mason contractors to ask questions prior to starting a construction contract. “How much staff is needed for the project? How long will it take to complete the job? Will the project produce a profit or a loss?”

With all the questions asked prior to setting foot on a construction site or even committing to a project, one that is not asked enough is, “How much of a risk is the potential customer?”

Assessing the creditworthiness of a prospective customer should be included in the checklist of items to be considered prior to bidding on a contract. Proper investigation of a potential customer reveals facts that a contractor would not otherwise learn. It also minimizes the possibility of concluding the contractor-customer relationship in litigation.

Areas to investigate
Investigating a potential customer’s history reduces the possibility of concluding a project with unpaid invoices. Inquire how long the owner or general contractor has been in business. Find out the names of affiliate businesses. Letters or abbreviations such as “LLC,” “Corp.,” or “Inc.” after a business’s name do not guarantee it is professional.

Do not be intimidated by the prospect of investigating the owner or the general contractor of the project. You are accustomed to providing the names of references prior to commencing a project. Demand the same of your prospective customer. If a prospective customer has operated under three different business names in a span of three years, it may be an indicator that the business has experienced reorganizations on a routine basis to avoid satisfying financial obligations.

If there are legitimate reasons for a business to operate under multiple names, ensure that you enter into a contract with the business that does not exist in name only. If you can, ask for verification of ability to pay, such as a bank account number and a proven balance in the bank account. The information will be useful in the event that you have to garnish the customer’s bank accounts in an effort to collect payment for unsatisfied judgments.

Talk with other creditors to gain insight into the creditworthiness of your prospective customer. Find out who the customer owes prior to the time that you enter into a contract. You will want to have an idea about how many other creditors will be competing with you, should you have to sue for payment. Your chances of receiving prompt payment will increase if your investigation reveals that the prospective customer pays invoices promptly.

Check to see if your prospective customer has been a party to any lawsuits. There is no cost to access court records in a majority of jurisdictions. Public information is often available on the Internet. Inquire about the circumstances if you learn that the prospective customer has been sued often by or sues its contractors. Then make a calculated decision about the benefits versus the burdens of entering into the relationship.

Having a backup plan
You do not have to abandon the prospect of the business relationship just because you learn that the prospective customer routinely defaults on payment. A business that appears less than ideal on paper may be owned by individuals with lots of personal assets. Have the principals or members of the business sign personal guaranties and provide home addresses and social security numbers for additional security. Make it a standard practice to have language in the contract that someone has the ability to pay, especially if your customer is a sole proprietorship or a partnership.

Mechanic’s lien rights are available in most cases for contractors who need to enforce payment. The laws vary in different jurisdictions, so make sure that you are covered prior to entering into an agreement. The priority given to contractors under mechanic’s lien statutes provides extra incentives for project owners or general contractors to pay subcontractors. Imposing said practicing credit management practices can dramatically increase your profits.


Juanita Ferguson is an Associate with the law firm of Bean, Kinney & Korman in Arlington, Va. She can be reached at jferguson@beankinney.
com or 703-525-4000.

This article is not intended to provide specific legal advice but, instead, as a general commentary regarding legal matters. You should consult with an attorney regarding your legal issues, as the advice will depend on your facts and the laws of your jurisdiction.

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