The perspectives of the various parties involved in a typical construction contract vary greatly when considering project financing. The inherent “give-and-take” nature of construction projects requires all participants to remain level-headed as revenues change hands to bring a project to fruition. In a typical project, the revenues of one party represent the expenditures of another participant. This can lead to impassioned conflicts between parties. As a contractor, you are equally concerned with project financing, but you want to ensure that the project continues according to schedule despite any financing disputes.
In this two-part series, the Naples construction lawyers at Cotney Construction Law will discuss the shifting financial burdens in the construction industry. Every construction project is a team effort, so it’s important to understand how money moves through each construction site, and who is responsible for directing funds to their appropriate place.
One of the most common inhibitors of construction projects is payment delays. When payments arrive late, there’s little incentive to work, so project timelines are compromised and worker sentiment drops. If one of the financial participants of a construction project is late making a payment, the financial burden and cash flow problem is transmitted to all other parties. While delaying payments can help reduce financing costs in some situations, shifting payment times doesn’t eliminate financing costs, as the financial burden is sustained.
In the past, organizations have utilized payment delays as a tool to transfer financing expenses to another party or to bridge a period of reduced financial resources. There are short-term benefits to this method, but it has long-term costs that must be accounted for later in the project timeline.
Most contractors do not possess large capital assets, nor do they have a strong line of credit available to cover delays in payment. Additionally, contractors are often considered a credit risk, so loans have a tendency to require a premium interest charge against them. When contractors are overburdened with substantial financing problems, they are more likely to affix premiums to their bids. On the other hand, they may not bid at all.
In a report on construction project financing, researchers from Carnegie Mellon University stated:
“…in New York City…city agencies had trouble attracting bidders; yet contractors were beating on the door to get work from…the local utility. Why?…the city was a notoriously slow payer…[the utility company] paid on the 20th of the month for work done to the first of the month.”
If bids are received and contracts are established, payment delays can still form the contractor’s basis for a claim against an agency.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.