Hello, everyone. Welcome to the tricks of your trade podcast. I'm your host, Michelle Severson construction adjudicator lawyer and director of tricks of your trade. Today on my podcast, I'm doing a little bit of an impromptu you crisis podcast on how to negotiate with the principle if your builder goes broke. So over the weekend, we saw a couple more builders going broke. And look, I have to tell you, the last six to 12 months of my career has involved helping mostly subcontractors with builders who have had liquidators appointed. So this is a really hot topic at the moment. And yesterday, I had a phone call from a subcontractor who was very distressed. And I've had calls like that in my career in the past, and it's been a worry, it's certainly something that I didn't expect to see so much in my line of work, in terms of helping people with the mental health aspect of dealing with really stressful situations like this. And one of the things that's really helped me as a lawyer, and in my line of work, to distill and separate out the emotion from these situations, is to have a really good plan. So if you go into these situations, and you're prepared, you're much less likely to make rash decisions, or jump to conclusions or do something that might be of detriment to yourself or your family. Or to even if it's not that drastic, if it's even just a monetary problem that you create, or you make matters worse, or you pull the plug on your business, because the distress around dealing with these situations is too much for you to be able to process at the time. So I appreciate while I'm recording this podcast, that it's really easy for me to say this when it's not my money. And when I am assisting clients in this situation, I make a point of saying that to them. Look, guys, I appreciate this is not my money, you're in a really stressful situation right now. And that is natural. So I don't want you to feel like you're not living up to your role in your business, because you are worried stressed and distressed at what has just happened. There are some contractors out there at the moment who are losing six figures left, right and center across multiple jobs with different builders. This is serious stuff. This is the type of stuff that you know, as a trades person. When you think about going out and starting a business and doing work. For money, you don't often think that you're going to be in situations very often where you have such big catastrophic consequences. The unfortunate reality of the industry at the moment is that we have a very volatile economic situation in the construction industry. And that's reflective of government's changing policies around security payment laws. And you know, even through COVID, when directors liabilities for insolvent, trading, were relaxed. Those are drastic legal measures and political measures that were put in place to try and assist the economy through this difficult time. We are having very big highs and very big lows at the moment, some contractors who are out there who are in high demand are able to ask for more money than they have been in the past. But it's not a stable environment for our industry. If you are doing work, and you're getting paid really high in for the work that you're doing, sometimes you might have signed quite a high value contract, but then the job doesn't get off the ground. And you might have 40 guys standing around saying well, where are we going today or you could have a bn workers who fly the coop because they don't have work to start today. So this is the situation that we're seeing a lot of subcontractors in where resourcing jobs is extremely difficult at the moment because people can be bought. And the money out there that's available for people who are in high demand is convincing enough for people to go. So I want to bring it back to what do we do if our builder goes broke? And how do we negotiate with our principal? Look, the sad thing is, in a lot of instances, the legal options available to you once a liquidator is appointed to your client are very limited, you actually have to put those measures in place before the liquidator is appointed. And in fact, in some instances before the contract is entered, you need to have those protections in place. So to be able to do that stuff retrospectively, like a band aid will be super, super expensive with lawyers and potentially maybe not even worth doing because there are even provisions that say that you can't sue somebody who's in liquidation. So there's legal protections for companies in liquidation and so the the options available to you if you go and get legal advice will be very limited. So what I want to talk to you today in our podcast is about the company actual practical things you can do, because you might have some leverage. And when I talk about leverage, it sounds like I'm talking about golf clubs and sports cars here, I'm not talking about any kind of nasty leverage, I'm talking about that same old rule of supply and demand that got you this job in the first place, and put you in the box seat with the builder to give you the job. And now, because the builder is out of the mix, there's still a guy who needs you. And you need to be able to do a little bit of an assessment to work out how much they need you and convince them to give you the job moving forward. So look, if you strip it all back and take the emotion out of this situation, which is easy for me to say, and not that easy to do. But one thing you might consider is look, this principals probably pretty worried too, they're probably pretty stressed, they're probably getting legal advice as well and finding out that, okay, the best thing they can possibly do is try to not pay the builders estate for for money that they should have been paying out of the contract. But they're also going to have liquidators after them chasing payment for funds. So these people are in a situation where they're realizing they are paying overs to get their job finished. And you need to convince them that it's best that they pay that extra money to you to get you to finish your work than to pay it to a new subcontractor. So in this podcast, I'm going to take you through a little bit of how you might put together a plan to negotiate with the principal. So you need to understand the power that you hold in the negotiation before you go in. And there's three main power indicators here that we talk about in negotiation a lot. But this particular situation lends itself to these three power indicators. The first one is time, the longer this job sits idle, and the principal can't get it finished, the more money it costs them. So you've got potentially a bank behind this principle with a quantity surveyor who's going Oh, dear, we haven't really got enough built to have an asset to sell here. So the principal is sort of halfway committed or in limbo land where they do need to get this building finished, or the job finished, so that it can be a saleable asset, at least as a baseline minimum. But ideally, they want to get out of this job, and they want to get the actual asset built. So you have time on your side, if you are already apprised of the job, you're intimately aware of what the drawings involve, you've got things and measures in place to be able to hit the ground running with this principle, if they pay you right now, then you have got that leverage of time. The second thing that you need to think about is how dependent is this person on me, so what's unique about me over my competitors, or a new subcontractor, that might mean the principle goes with me, and I'll drill down into that in a second. The third thing that you might have here is relationships. So oftentimes, when we see builders go broke, you will see project teams, sometimes staff of building companies who will come in to save the day and be good blokes and, and, you know, try to help these principles along. And that's fantastic for you. Because if you've got a relationship with the staff of the building company, hopefully, you've still got a relationship with the staff of the building company, I would sort of caveat that with sometimes builders who are going broke, don't behave their best. And it's quite common for you to have to take debt recovery measures against builders, so maybe that relationship might have soured. But if you have any kind of relationship leftover with anyone who is involved in this mix, that is going to be leveraged for you moving forward, because the great unknown that these principals will have is that they will be going Can I trust this subby not to come back and claim extra money from me for things I didn't anticipate or we didn't agree to? And what's going to happen with the subbies retention, so they're going to either cut a deal with you that incorporates your attention, or they're going to try to contract out of giving you any retention. So these are all parts of the bargaining chip that you might think about negotiating with the principal moving forward. So those three types, those three dependency factors are super important for you. Think about your time think about dependency, think about relationships, and you want to do those, you want to do that little test, not just for the principle, in terms of how much do they need me, you want to do it for yourself as well? How much do I need this principle to cut a deal with me so that you can have a good yardstick for whether you are what you're willing to be paid to finish this job? So there's a little bit of a mathematical exercise that you need to do at this point where you sit down and go, how much of myself into the job, how much am I owed?
If the if the principal pays me to date? Will I be working for free for the rest of this job? Or am I better off cutting my losses now walking away, so I want you to do that. Number one is dollars wise does this stack up? So it could well be that it just doesn't, but in some instances certainly will stick out for you. And you'll be thinking, look, I need to do whatever it takes to get that money that I made from that builder. And if you're in a position where if not getting paid by what the pay what the builder owes, you will be catastrophic and potentially sink your business. Don't look so short sighted Lee that you take the payment and then still don't have the resources or the funds to perform because there can be situations where if you take payment from a principal, and for whatever reason, you don't end up finishing that job, there's a good chance that principal is going to come knocking for that money back. And if you've done that you may have exhausted or cut off any ability for you to recover that money through the liquidator and or trade credit insurance if you have a trade credit insurance policy. So I'm going to cut circle back to the Trade credit insurance thing at the end of this podcast. It's really important you understand how to manage that if you have got a trade credit insurance policy. But these are the ways that you're going to know if you've got the time dependency relationships, leverage. So ask yourself these questions. Am I replaceable trade? And I know there's a lot of pastors and painters who listened to my podcasts and I'm sorry to say that if you are in one of those really highly competitive trades where it's relatively simple for them to buy more material, or you are a labor only trade, say your labor only Tyler, you may be replaceable trait. So you need to take a conservative approach or potentially even look at this and think, okay, what can I get out of this principle? And how can I get that money? It could well be when you build it goes broke if you are a pipe replaceable trade, that you need to take the most aggressive approach across possible and you may need to get some legal advice. Can I just say guys, you should always get legal advice, right. So there are ways under security payment laws. If you've done certain steps before the builder goes broke, there are ways you might be able to secure your payment with the principal. If you do it before the builder goes into liquidation, and oftentimes, bad stuff or building companies will give us a little flare in the air and say, look, we've just all been made redundant and liquidators are coming in. So heads up subbies. This is what's happening. If you get one of those calls, do not sit around for three or four days and wait to see what happens. Contact your solicitor contract, contact a construction lawyer, make sure they're a construction lawyer and get some advice about how you might quickly take steps to become a secured creditor because it is possible. The other thing I would say is if you do have if you're the type of trade who has any kind of PPSR or PPS registration, say for example, you're a scaffolder and you have a PPS agreement with the builder. And you've made registrations on the PPSR. Or if you're a gantry savvy, you know the type of people I'm talking about where if you have got bulk material on site, you have a PPS registration, you might have put yourself into a better position than the other subbies in terms of getting in line to get paid. So if you've taken those steps, don't just overlook those go and get the advice right now about how you might get some help. So if you're not a replaceable trade, that's your first threshold question. Am I a replaceable trade? Okay, no, I'm not a replaceable trade. The next question is, did I need me for certification? You've just put yourself up a notch if you're a services trade, particularly fire related, who is required for certification? So you want to start looking at am I a bit of a unicorn here? Do they need be? What is that dependency indicator? Have you already manufactured or purchased lead time items. So if you have been paid for unfixed goods, or you've been paid a deposit of some clients, and you have already manufactured a bulk amount of materials, that will take a long time for somebody else to come in and start afresh. You have got some very good leverage here, because the principal is going to want to keep you on this job. And then you need the last one there. The fourth one is what are the continuity of warranties I'm providing, if I'm providing a warranty that they cannot get from someone else, because we've used not word or we've used a particular I'm just using that as an example, guys, but any particular supply either where you're giving continuity of warranties from the supplier, and that warranty will be broken. If they don't use you. Then you will have some serious leverage in this negotiation. So it's not all despairing. If your builder goes broke, sometimes it may not be a bad thing. If you build it was unpredictable and not paying you and making your life hell and making it a really difficult process to finish this job because they were not paying you and then you had to suspend work and so you didn't have continuity of work. through labor, it's possible that it could have cost you a lot more money to perform for the builder, without them going broke, then it might be now for you to just get a clean run with the principle. So if there's any kind of silver lining there, I really want you to hear that in this podcast episode, because there are a lot of subbies out there at the moment who are panicking, and you need to step back. And I'm easy for Michelle to say, step back and take a clean look at this, but step back and decide look logically, within reason, should I be panicking right now? Do I have the leverage here? Do I have? Am I a time advantage.do They depend on me for things, and what relationships do I have that I can harness because those relationships will help you communicate that to the principal, if you don't even know who the principal is, it's going to be difficult for you to get a conversation with them, you'll probably have to do it either through lawyers or through the superintendent. And if that be the case, that's fine. You work with the staffer that you're talking to you work with the person that you're talking to in the negotiation, and you try to get the most you can out of that conversation. Now, I want to touch on something that's been happening recently in the industry, and we're seeing a lot of principals and developers who are going to the media and saying, we're such good people, we're going to pay all the subbies, everybody will carry on with his job, we will see this project through. And then they promptly ask the subbies for a discount. And they will dangle the carrot of giving you a very big payment, it might be that they say hey, we'll pay you everything you're owed, but we're not paying your attention. And that's the discount. And if you've had 5% of your contract sum already taken by the builder, that's a decent discount, it's 5% of the contracts value. So the first thing they might do is ask you for a discount. We've seen developers in this in this last period, ask subcontractors to discount 25% of their payments. So we're talking about 25% of what the builder owes you and 25% of the contract moving forward. Now, if they asked you to do that, and you have got all the leverage, if you if you've got those four things that we talked about just a second ago, you're not replaceable, you're required for certification, you've already manufactured goods, and they need you to deliver it for lead times and you've got continuity of warranties that they need, I would not be discounting the rest of your work, you need to go back and communicate to them that the value that you're providing, by far outweighs any discount that they are trying to achieve. And that if they try to discount the job and make you work for free, all it's gonna do is sell you the relationship. So you need to communicate to them that, hey, guess what, Mr. Principal, if I'm fixing my price, moving forward through this tumultuous situation, you should be grateful. And I'm not going to be accepting any discount on what I'm owed. Now, guys, I know that's going to be gutsy to say to somebody in a negotiation, but let me tell you, if you've got all of those leverage indicators that I've just talked about, they need you. And they're asking you for a discount just to see how good they can do, they're already happy that they've got you on board to finish the job. And you're gonna hold your price your original contract price with the builder. So
you might be surprised to find and you can say to them in that moment, hey, I'm happy to sign a confidentiality agreement. So none of the other subbies know I didn't give a discount. So be upfront and tell them that, but you need to look after yourself there and go, no, no discounts you you guys are getting value for money here. Now just circling back to talk about this trade credit insurance policy business, if you have a trade credit insurance policy and your builder goes broke, the first thing you need to do is make sure you comply with the provisions of the trade credit insurance policy. So that should be your number one priority is making sure that you uphold that policy. Now some trade credit insurance policies will have a preference payments underwriting in them, hopefully yours does. What a preference payments is, is if a liquidator is appointed to a builder or any company, the liquidator is legally obliged to look six months back from the date that the liquidator was appointed and check to see if any body was paid money that might have been a preference over other creditors. And some of the criteria involved looking at whether or not that person who got paid should have known that the builder was in financial distress. You might be thinking, well, builders don't just call you up and say, Hey, I'm going broke. But what they do do is pay you consistently late and they might enter into altered payment terms with you and that might not be a special form they send you they might just send you an email saying Do you guys mind if we pay you next Thursday 20% And then the Friday after the rest? And if they consistently did that over a period of time the liquidator might say well look, you guys should have reasonably known that this builder was struggling. You You do not want to liquidator chasing you for preference payments. And I hold a pretty controversial view that sometimes you're better off being paid by your trade credit insurer than you are by your builder if your builder goes broke. So I'm a pretty big advocate for trade credit insurance at the moment. It's a very expensive policy. But I think it's more valuable in some instances than some of the legally required policies that you have that you rarely claim on. At the moment, it's likely that you might claim on a trade credit insurance policy. So if you've never heard of one, have a look into it. A trade credit insurance policy basically covers you for not getting paid by your builder, if you build it goes broke, or if you build it just refuses to pay you. So there's lots of things to look into with that. Now, if you've paid for a trade credit insurance policy, you'll be hearing me it's an expensive policy, you do not want to waste. And if you've got the ability to to be covered for preference payments, you might also have the ability to be covered for retentions. So it's super important that the very first thing you do is you weigh up if my trade credit insurance policy is going to cover me for 90% of what I'm owed, whether or not it retentions are included. Why would I settle with the principal for 75%, of what I've owed. So you start to look at this and go, this deal that I'm being offered, it's okay to negotiate with the principal. But please do not go and cut a deal with the principal without talking to your trade credit insurer, it may not be worth it to you to get paid by the principal if the risk of preference payments is high. So say for example, you will want that the builder was not on solid ground or the builder had sent you an email saying we're really struggling with cash flow, or you have entered into payment terms. And you've been paid hundreds and hundreds of 1000s of dollars in the lead up to this builder going broke. Preference payments are a real risk that you need to take into consideration. So first and foremost, make sure that you understand what is in your trade credit insurance policy. And you don't do anything by negotiating with this principle to undermine that policy. And if you do decide that you want to take a deal with the principal you should be communicating with your insurer through your broker, and notifying them and saying I've been offered this. Do you have any questions about what I've been offered? Now in the industry recently, we have seen some I'm going to call them Bush Lloyd. So Bush Lloyd settlement agreements. It's basically been Excel spreadsheets put together by engineers or superintendents or project managers that have tried to stipulate what the terms of your settlement agreement are, guys, there's a place for that. And if you're owed less than $50,000, and you're happy to just go along with it, and the risks are not business thinking risks for you in this transaction, then by all means, you might make a commercial decision to go along with that. But if you are owed a fair crack of cash, you've got a trade credit insurance policy in play or you don't have trade credit insurance policy. So you've got no safety net. And you're being offered to sign your life away on a document that somebody in the principal's campus prepared, please, please, please get legal advice. There are things that you need to make sure you don't have carried over from the builders contract into your new agreement that could well be cause for the principal to short pay you. And one really good example is no doubt if your builder is going broke your date for practical completion will be last year or the year before and suddenly you are you could be up the creek for LDS because the principal saying you were held to a practical completion date, particularly if you enter into a deed of Novation. So there can be Novation deeds that you might be offered by the principal's camp, or even the principal's lawyer. Bear in mind, if the principal has a lawyer, that lawyer is acting for the principal, they have a fiduciary duty, a very strict legal obligation to make sure that they act in the best interests of their client, you're not that client. So you need to make sure that you get legal advice about these settlement agreements that you might be offered. But the things that you can do in the short term, is you can make inroads with the principal, you can communicate to them, Hey, we've already manufactured this material. You don't have to wait for lead times with us. You have continuity of warranties with us. We're reliable. You know, we've been performing today, we understand the job. We've been on the journey with the project we're happy to complete. So we're going to save time if you go with me. And if you need our certification documents, you might want to remind them of that as well. That's not to say that you should threaten to withhold certification documents, but you might need to remind them that it will be very difficult for a takeover subcontractor to actually see II sometimes what you have buried or covered over in the, in the natural course of construction in order for them to provide that certification and a lot of people won't do that without invasive checks to make sure that what they are certifying is actually done right. So I hope this podcast has been helpful for you. And I know I just want to circle back and say, again, I know this is a stressful time, it's expected that this would be a stressful time, this may not be the only builder that you're working, working with at the moment that ends up in this situation. And you need to be on the lookout for the warning signs. So taking a conservative approach to leaving materials on site, or delivering bulk materials, it's a really good idea at the moment. Anything you can do to mitigate the number of eggs you've got in that basket in the care of the builder is a really good idea. So if you have any questions about this podcast, you can always send me an email questions at tricks of your trade.com Today you but until next time, I hope you are all surviving out there, but guys, it's the construction apocalypse. People are talking in terms of this being the construction apocalypse. I don't like to be a doomsday prepper but we need to look realistically at what's going on with the economy and and I hope this podcast has been helpful.
Transcribed by https://otter.ai
