The ripple effects of a bankruptcy in the construction sector can be far-reaching, impacting not just the entity filing for bankruptcy but also its partners, including general contractors, subcontractors, suppliers, and owners. The financial stability of your construction business can be severely affected by the bankruptcy of a third party, regardless of its tier in the construction process. However, with the right tools and resources, you can protect your business from significant losses. Here are key strategies and resources to consider:
Thorough Due Diligence
Before entering into any agreement, conduct comprehensive due diligence on the financial health and stability of any other party to your agreement. This includes reviewing financial statements, checking for any previous bankruptcy filings, and understanding a party’s payment history. Companies like Dun & Bradstreet have tools that provide credit reports and risk assessments for businesses, which can be invaluable in this process.
Use of Protective Contractual Provisions
Incorporate clauses into your contracts that provide protection in the event of bankruptcy. These can include:
- Personal Guarantees: Require personal guarantees from the principals of the companies with whom you’re doing business.
- Payment Bonds: Insist on payment bonds for projects, which can serve as a safety net ensuring payment even if a party declares bankruptcy.
- Right to Stop Work: Include a clause that allows for work to cease without penalty if payment is not received in accordance with contractual provisions.
Early Lien Filings
Make use of mechanic’s liens whenever possible. Filing a lien early in the project may secure your position as a creditor in case of a bankruptcy filing. Tools like Levelset can help manage the process of filing a lien, ensuring you meet all legal requirements and deadlines, but the best protection to ensure that lien requirements are met is to seek counsel experienced in lien filings.
Credit Monitoring Services
Subscribe to a credit monitoring service to receive alerts on any significant changes in the credit status of companies with whom you do business. Services like Experian’s Business Credit Reports and Monitoring offer real-time updates, giving you a heads-up on potential bankruptcy filings before they occur.
Bankruptcy Watch Lists
Several online platforms and services offer bankruptcy watch lists, which can notify you if a company enters bankruptcy proceedings. This early warning can be crucial in taking proactive steps to mitigate potential impacts.
Legal Consultation and Representation
Regularly consult with legal professionals who specialize in construction law and bankruptcy. They can offer guidance on contract drafting, risk assessment, and strategies for recovery if you’re affected by a third-party bankruptcy. Bean Kinney & Korman provides specialized services in these areas, ensuring you have experienced advocates on your side.
Industry Associations
Engage with industry associations such as Associated Builders and Contractors. These organizations often provide resources, training, and networking opportunities that can help you navigate the complexities of bankruptcy in the construction sector.
Conclusion
Protecting your construction business from the effects of a third-party bankruptcy involves a combination of proactive strategies, from due diligence and protective contractual provisions to leveraging the right tools and resources. By staying informed and prepared, you can mitigate the risks and ensure your business remains resilient in the face of financial uncertainties.
If you have questions about construction law in Virginia, Maryland, or D.C., please contact Juanita Ferguson, at jferguson@beankinney.com or (703) 525-4000.
This article is for informational purposes only and does not contain or convey legal advice. Consult a lawyer. Any views or opinions expressed herein are those of the author and are not necessarily the views of any client.