Major construction projects involve risk for all parties. The client has to provide partial payment as a deposit and may need to cover various construction costs as the project proceeds. They may find themselves struggling if there are delays in the completion of the project or if the company that they hired performs work that does not align with the standards set by the client.
Construction firms have to accept partial payment and commit a huge amount of resources and manpower to complete a project. They run the risk of a client attempting to withhold funds over minor issues. Sometimes, both parties enter into a commercial construction agreement in good faith, only to have something unexpected go wrong.
One of the worst possible scenarios for a construction firm involves a client becoming insolvent before the completion of a large commercial construction project. How can a business protect against such scenarios and respond to them effectively?
Contracts can solidify business protections
Construction contracts often include a variety of specific terms intended to protect both parties. It is possible to negotiate contract terms that help protect the rights of a construction firm to pursue payment in full when the client is incapable of completing the agreed-upon arrangements.
For example, construction firms can specifically include terms that reinforce their right to pursue liens against the real property used for the construction project and any improvements on it if the property already belongs to the client.
Construction firms may also be able to integrate proof of financing and lender involvement from early on and throughout the project. Custom contracts can go a long way toward mitigating the risk of a client becoming insolvent before the end of a construction project and failing to make payment in full for the services provided.
Legal action is sometimes necessary
There are a host of different legal methods to pursue compensation from an insolvent business. Liens against real property are one option. Claims pursued in bankruptcy court are another possibility.
Failed businesses often undergo Chapter 7 bankruptcy proceedings. Construction firms owed money by the insolvent organization may be able to submit a claim to the courts in pursuit of compensation later. If the courts order the liquidation of company assets, some of the resources that belong to the business could help pay what various creditors deserve.
Proper contractual protections before beginning a project and assertive collection efforts when necessary are both important for construction firms seeking to mitigate losses. Taking immediate action is often necessary when a business client becomes insolvent during a major project.