in financing the construction and an
owner looking to convey clear title.
Assuming the owner retains the
appropriate holdback amount in
accordance with the governing
legislation or terms of the contract
and does not make further advances
in the face of liens, their liability
to a subcontractor should be
limited to the holdback amount.
3 Funds received are not being held in trust for workers and suppliers.
All amounts received by owners,
contractors, or subcontractors for
the project are subject to a trust for
the benefit of persons who supply
work or materials to complete the
project. If these funds are used for
another purpose by any of these
parties, or by a financial institution
in receipt of advances provided by
an owner or contractor, they can
be held liable for breach of trust.
Failure to pay may not be an issue
for the owner who has retained the
appropriate holdback, but rather for
the contractor who has failed to pay
his subcontractors on a timely basis
from funds provided by the owner.
When a lender receives a request
for information with respect to
advances made or mortgage details
from a contractor/subcontractor (a
right available to parties in some
jurisdictions), this can be a red
flag that there may be a problem
with parties not getting paid.
4 Payments are not tied to verifiable milestones.
Other than holdback requirements,
contractors and subcontractors are
entitled to timely payment if they
fulfill their contractual obligations
and meet project milestones. From
the contractor’s perspective, certain
early milestones are needed to cover
the cash costs of mobilization. From
an owner’s perspective, paying out
too much too soon can cause a
problem at the back end of the project,
when the contractor may need to be
incentivized for timely completion.
In some instances, such as when
work defects are identified, owners
may exercise their right to withhold
payment. In times when the industry
is under stress because demand
for services exceeds the supply
of labor or materials, withholding
payments can result in contractors or
subcontractors stopping work. When
work delays put the project behind
schedule, there can be significant
impacts on the project’s profitability.
5 A failure to check for outstanding litigation against the client.
In addition to lien and trust claims,
there may be other matters that
could lead to litigation and impact
the finances of the borrower or
parent providing a guarantee.
A lender should look carefully at
financial statements for signs of
any litigation outstanding against
a client and ask questions of the
senior officers regarding outstanding
claims, overdue payables, and
other potential liabilities.
6 The client is not in compliance with government regulations or
Failure to adhere to local,
provincial/state, or federal
government regulations as well
as contract terms could seriously
impact the timely completion
and profitability of a project.
It’s critical for the contractor to
have full knowledge of regulations
(environmental, health and safety,
etc.) and permit requirements
that will affect the project, as
failure to comply can result in
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