February PAY!
PROJECT FINANCING
Beware of Weak Links in the Project Financing Chain
Being familiar with the owner's financing
of a construction project is a good idea on any project, but especially
when the proposed contract includes a contingent payment clause.
When the contract has a "pay-if-paid" clause, or even a
"pay-when-paid" clause, the risk of nonpayment, or delayed or
partial payment, is high. If there is a contingent payment clause
and the owner's financing is questionable, trouble down the road is not
hard to predict.
As a general rule, the more quality project
financing information you can obtain, the better. For example,
guidelines published by the Associated General Contractors of America say
that the actual loan agreements for construction and permanent financing
are "preferable over a simple commitment letter, because the loan
documents will include all of the lender conditions and
requirements."
Luckily, the subcontractor that wants to
investigate project financing has some excellent tools at its
disposal. You may wish to use ASA's generic "Addendum to
Subcontract," which includes a provision that you may use as a model
for your own contract modifications or addenda:
Subcontractor shall be provided, upon
written request, with the legal description of the property, the name,
address and representative of the Owner, and evidence of adequate owner
project financing. The Contractor shall promptly notify
Subcontractor of material changes in the Owner's identity or financial
arrangements. Subcontractor shall not be obligated to commence or
continue Subcontract Work unless adequate assurance of payment is
received.
If the customer questions your requirement
of project financing disclosure, you may point out that many industry
documents, including documents from ASA, the American Institute of
Architects, the Associated General Contractors of America, the
Construction Management Association of America and the Design-Build
Institute of America, contain project financing disclosure terms.
Most of these documents allow the contractor not to commence work unless
the project financing information is provided. Some even allow
contractors to stop work already in progress if the financing information
is not provided in a timely manner. Since you will not have a
contract with the owner, the only assurance of obtaining the financing
information is through the subcontract.
On publicly funded projects, it is a good
idea to check records of public agencies to ensure that full
appropriations have been secured. If the funding has not been
appropriated, you may wish to modify your contract to deal with the
possibility that the funds do not come through.
In addition to contractual recourse,
commercial services like Dun & Bradstreet (www.dunbradstreet.com),
public services such as the business center at your local library, and
not-for-profit services such as ASA's members-only National Business
Practices Interchange (www.asaonline.com/members), may be helpful to you
in the quest for quality project financing information. ASA offers
the ASA generic "Addendum to Subcontract: and the book The General
Contractor Factor in the members-only section of the ASA Web
site. ASA's Payment Advocacy Year (PAY!) Web page at www.asaonline.com/pay.htm
also contains project financing resources.
Click here for: PAY!
Quick Primer - Project Financing
(c) American Subcontractors Association,
Inc. ASA chapters have permission to
reproduce this article in all media. All other rights are reserved.
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