Subcontractor defaults pose an urgent and significant risk to the construction industry, with potentially far-reaching consequences. The 2024 AGC/FMI Study revealed that 70% of survey respondents reported an increase in subcontractor distress or defaults compared to the previous year, and nearly half of respondents reported project disruptions due to subcontractor defaults. This underscores the pressing need for effective risk management strategies.
To help manage these risks effectively, ConsensusDocs has created a Prequalification and Subcontractor Default Prevention Resource Center, which is available here. The resource center provides ConsensusDocs sample standard prequalification statements for subcontractors, constructors/general contractors, design-builders, and design professionals. A wealth of valuable resources, including financial guidelines, articles, webinars, and more are also available for free.
Contract terms play a fundamental role in subcontractor default prevention. The general terms and conditions in ConsensusDocs standard contract documents encourage timely payment. For instance, payment is required within 20 days from submitting an application of payment that is not rejected. Furthermore, retention is eliminated once a project is 50% complete. Since payment flow is the lifeblood of constructors and specialty contractors, it is essential to keep these payment contractual terms in mind.
Prequalification is not just a proactive measure, but a crucial one to reduce risk. Constructors are wise to prequalify not only their direct subcontractors but also those further down as well as up the contractual chain. Ensuring the ability to pay and adequate project financing is a prudent step construction can take to prequalify their owner clients, who are up the contractual chain. A late-paying or difficult owner client can be the root cause of a troubled project. Unlike other standard contract documents, ConsensusDocs contracts provide the ability to request financial information before and after the commencement of the project. Significantly, ConsensusDocs is the only publisher of standard documents that offers a balanced way for requiring project financial information from owners to ensure an owner’s ability to pay (ConsensusDocs 290 Guidelines for Owner Financial Questionnaire and ConsensusDocs 290.1 Owner Financial Questionnaire).n
Comments or questions about this article can be directed to Brian Perlberg, Executive Director and Senior Counsel, ConsensusDocs Coalition, at bperlberg@ConsensusDocs.org.