Talk Surfaces of More Legal Protection for Subcontractors, Suppliers

by George Waldon  on Monday, Dec. 6, 2010 12:00 am  

Some general contractors have a habit of treating construction funds they administer as their own, even when much of the money is supposed to pay subcontractors and suppliers.

That practice slides by if everyone gets paid after a project is completed. But when a general contractor's mismanagement results in shortfalls, unpaid firms are left holding the bag.

"This is why the business needs to evolve, perhaps through legislation," said Little Rock attorney Bill Watt, who represents embattled May Construction Co. of Little Rock.

Continued concern over this issue has caused some discussion about possible changes in Arkansas law to follow up on legislative actions in 2009 to tighten up the state's lien laws.

One such remedy is known as a lock-box statute, which requires third-party oversight on the flow of construction funds. It creates a new layer of checks and balances in the process, removing some power from the general contractor and providing a safeguard for subcontractors.

"I see the absolute sense in it, and I don't know who would be opposed," said state Sen. David Johnson of Little Rock.

State laws remain tilted in favor of property owners and lenders, and perfecting a lien claim is still considered as much art as science. The increase in troubled construction projects that accompanied the slowdown in real estate and financial markets has heightened awareness of the pitfalls.

David Grace, a North Little Rock attorney who numbers bonding companies among his clientele, said proper oversight of construction funds is an important issue.

"Bonding companies get to deal with that all the time," Grace said. "A lot of people in the construction business don't keep the best records in the world."

On a bonded construction job, bonding companies are an insurance safety net. The firms step in to clean up financial problems when a construction project goes awry.

Bonding is a line item of cost that owners of private-sector projects often choose to cut, unlike public-sector construction jobs, where bonding is required under Arkansas law.

Bill Hannah, CEO of Nabholz Construction Corp. of Conway, said his firm requires documentation from second-tier subcontractors as well as subcontractors.

"If we think there are some financial problems with a subcontractor, we will contact their suppliers to make sure they are current," Hannah said.

He wonders if a lock-box statute is needed with the existing regulations and professional oversight in place.

"I don't think it's necessarily a legislative issue as much as a business administration problem," Hannah said. "I'm not necessarily a proponent of a legislative solution.

"I'm more of a proponent of contractors taking care of themselves and their subcontractors. If we as contractors do a better job and pay attention to what they're doing with the money, then everyone will be taken care of."



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