Construction Trend: Quick Issue Vendor Liens and Lower Subcontractors Insurance Limits

From my perspective, these tough economic times have had an impact the unwritten rules that long governed the way construction businesses operate. Case in point: the vendors employed by subcontractors seem much quicker to file liens these days, even without communicating with the contractor. Insurance limits are being lowered on aggregate and umbrella coverage to save cost. I think both are driven by credit and profit concerns in today’s financial climate. Both create undue hardship on relationships.

In Florida, if businesses provide goods or services, are not in direct contact with the owner they are working for and they wish to preserve their lien rights, they must provide a “notice to owner.” We are seeing vendors and subcontractors providing these notices in many states that have no such law. It creates a creditability question in the way the owner or the lender views the project contractor. This can lead to slow creditability question, which tends to complicate the problems further.

A few things you might consider moving forward:

Listen to what the market is saying. Know the reputation of the contractor you are commissioning to build your project. A low, low price will feel good until credit problems erode trust over the course of construction.

Sometimes, vendors may unknowingly or knowingly misappropriate funds that are received from subcontractors for their account on a specific project.

Keep communication open on all fronts. Ensure paperwork is completed promptly, but isn’t unduly burdensome for the circumstances of the project. Paperwork should match the project. I would rather have a subcontractor or vendor work on the build of our projects than the details of the paperwork…if I trust them.

Be proactive by creating tools to motivate prompt payment to the responsible parties. Don’t let the funds get sidetracked to other non-related projects.

Everyone is looking for the angles these days, so deal with a responsible contractor and subcontractors who know the project and the market.

If a subcontractor is not currently carrying the insurance limits normally required, then consider reevaluating the particular risk of that project. Maybe go with the lower limits.

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Merrill Stewart is Founder and President of the Stewart Perry Company, a commercial building contractor based in Birmingham, Ala. Contact him via email.

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