Joint check agreements may be used on construction projects to help alleviate an owner’s concern that the general contractor may fail to pay its subcontractors or material suppliers. A joint check agreement is a contract between the owner, a general contractor and a subcontractors or supplier that requires payments to be made by the owner via check made payable to both the general contractor and the subcontractor or supplier. Using this method, the check would need to be endorsed by both parties before it can be cashed.
What are the risks associated with non-payment by a general contractor to its subcontractors or suppliers?
If a general contractor does not pay its subcontractor or material supplier, that entity can file a construction lien on the property which can lead to delays and litigation. The filing of a lien can also cause an owner to default on its construction loan and result in significant legal expense to remove the lien or defend the litigation.
Another concern is that the subcontractor or material supplier can decide to stop work or refuse to provide additional material – which can results in costly project delays.
Why are joint check agreements useful on construction projects?
A joint check agreement is a useful tool for owners to ensure project progression by eliminating disputes or delays prevents caused by payment issues. It also prevents a general contractor from misusing project funds and ensures that lower-tier subcontractors or material suppliers receive direct payment. Finally, it may encourage suppliers to extend credit to subcontractors because they do not need to be concerned about the risk of non-payment.
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