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What kind of precautions we can take to protect ourselves if we order the materials and the job falls through?

NevadaConstruction Contract

We have accepted a contract for a federal project and it will cost quite a bit to start up. I am wondering what kind of precautions we can take to protect ourselves if we order the materials and the job falls through? We will bill them for the start up cost before we order but they have a 90day billing cycle and we will have to wait a while for payment. What should we do?

1 reply

Jul 9, 2019

That's a good question. As you likely now, payment bond claims can really only be made for labor or materials that have been furnished to a project, so a subcontractor or supplier can't really lean on the bond for potential protection when starting up a job - at least not until work has actually been provided for the job. Like you mentioned above, though, there can be significant costs associated with prepping for a big job that might eventually fall through. While there's no one answer for how to best protect yourself, here are a few potential options.

For one, it might be possible to build protections right into the contract with your customer. This would likely be the strongest place to build in potential protections. Plus, it's not unthinkable that they'd appreciate the risk inherent in starting up a job by obtaining significant materials, etc. So, they might be amenable to providing protection right there in the contract. Granted, a customer usually has a lot of the power in contract negotiations, so it might not be possible. But it could be worth a shot.

It might also be helpful to arrange a flexible contract with a supplier, particularly if it's an abnormally large order being made. If there's an existing relationship, this would probably be easier. But, regardless, since the supplier is likely much better equipped to handle a sizeable amount of materials and far better equipped to try and sell unused materials, arranging a contingency plan with them might be an option.

It's simple, and not necessarily an active route, but eyeing potential buyers or other jobs that might benefit from the unused materials might be a good start, too. That way, if the project does fall through, at least backup plans have been considered and there might be a course of action for getting out from under the cost of materials.

Ultimately, though - there's always a market for unused materials. While it might bring back less than 100 cents on the dollar, reselling or repurposing materials intended for a different job is always an option. It's certainly not security like with a mechanics lien or a bond claim, but it's better than nothing - and for many businesses, it's worth the gamble.

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