Construction is risky business. The law of supply and demand creates the foundation of basic economics and the construction industry is no exception. As markets tighten and work becomes scarce, marginal tactics and strategies become viable options for some stakeholders in the construction process, as outlined in your editorial, "Time for State Legislatures to Stand Up for Subs" (ENR 10/18 p. 104). In the name of backlog management, an option that would otherwise represent the "unthinkable" becomes a risk to be considered.
As the unthinkable is introduced, ethics enter the equation. Although the constant ebb and flow of marketplace activity creates an element of variability, ethics relate to the very character of a firm or organization and tend to be constant. Experience shows us that firms that engage in unethical behavior tend to engage in it independent of market conditions. But as a whole, ethics throughout our industry do not demonstrate significant deterioration as a function of market activity. To the extent that unethical behavior exists, it crosses all lines to include owners, architects, contractors, subcontractors and suppliers.
Ultimately the construction process begins and ends with the owner. As the party who initiates the process, the owner seeks to limit its liability and maximize value for its investment. In pursuit of those goals, owners assign risk to the general contractor. This sets in motion a cascading effect whereby the GC assigns that risk downstream. As market conditions tighten, stakeholders at every level are prone to increase their appetite for risk and are willing to accept contractual terms previously considered unacceptable. These terms may include more onerous indemnification, insurance endorsements and payment provisions.
Payment, although historically a point of contention between GCs and subs, is a common concern of all parties associated with the project. If there is a failure on the part of our industry relative to payment, it is the lack of due diligence in prequalifying the owner and then holding it accountable for timely payment. Our traditional debate involves the myopic argument of the merits of pay-when-paid versus pay-if-paid clauses. In the event of owner default, very few if any, general contractors have the financial capacity to satisfy creditors. Then, downstream subcontractors and suppliers may take comfort in pay-when-paid clauses but have little chance for recovery.
Legislation that outlaws pay-if-paid clauses may be a path of least resistance for subcontractors, but it invites the influence of additional regulation in lieu of free market influence. The answer to payment lies in owner prequalification and accountability and should be an issue to unite our industry, not divide it.
In 2003, Associated General Contractors assembled a task force that was representative of a cross-section of our industry to address prompt payment and owner accountability. The result can be found at www.agc.org in the Prompt Payment e-clearinghouse.
Legislation as a tool for risk management should be pursued thoughtfully and on a limited basis. And in this case, any legislative effort should address the common goal that we all sharesecuring owner payment.
Hold Owners Accountable
November 22, 2004