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HARDING, SHYMANSKI & COMPANY eNEWSLETTER |
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Enforcing Conditional Payment Clauses
Historically general contractors (GC) assumed the risk of an owner's nonpayment, however many subcontracts now include payment clauses that condition subcontractor payment to the GC receipt of payment from the owner. It is important to note that these "pay-when-paid" or "pay-if-paid" clauses are not broadly enforceable but as subcontractor you should determine early on weather the subcontract contains one of these clauses to avoid surprises after the work on the job is completed.
Under a pay-when-paid contract, the GC is typically required to make progress payments within a certain time period after payments are received. The courts have generally interpreted that a pay-when-paid clause permits the GC to delay payment only for a reasonable amount of time. This leaves the risk of owner nonpayment squarely on the shoulders of the GC and gives the subcontractor unconditional promise of payment. Conversely, a pay-if-paid clause conditions all payments to the sub on the receipt of full payment from the owner and thus the sub bears the full risk of the owner's nonpayment. That shift of risk from the GC to the sub is the hallmark of a pay-if-paid clause. Subcontract language such as, "Subcontractor agrees that Contractor shall never be obligated to pay Subcontractor under any circumstances, unless and until funds are in hand received by Contractor in full," has been found by the court to clearly shift the risk to the sub and therefore does not act as a pay-when-paid clause. The problem with these types of clauses for subs is twofold because of the lack of a direct contractual agreement between the sub and the owner and because of state lien laws may prevent filing in these instances. Many states have a "due and owing" trigger for filing a mechanics lien. Under a pay-if-paid contract, the GC owes noting until full payment is received form the owner.
Subcontractors must become familiar with their payment rights under their subcontracts as there are no guarantees when it comes to conditional payment clauses. The enforceability of those clauses hinge on the contract language used and the state law that governs over the individual contract.
Contact Greg Elpers, CPA, or Paul Esche, CPA at (800) 880-7800 with questions. |
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Harding, Shymanski & Company, P.S.C. now offers assistance to Master Builder software users.
Lisa C Frank, CPA, Senior Consultant in Harding, Shymanski & Company, P.S.C. Outsourcing Department is now a member of the Sage Master Builder Accountants Network.
Lisa can offer software and accounting support to users of the Master Builder construction software. Through this membership Harding Shymanski has access to a network of other accountants and Sage professionals serving the Master Builder family of users.
Contact Lisa Frank, CPA, (800) 880-7800 today. |
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Construction and Real Estate
Utilizing our unique and specialized expertise to assist you in the challenges facing your industry...
Cash flow management... how to improve bonding capacity... multi-state tax issues... depletion... design/build business issues... contract claims... financing... these are all issues that you face on a regular basis. However, often it is difficult to find the time to devote to these key issues.
Because Harding, Shymanski & Company, P.S.C. is committed to providing quality service to our construction, real estate and mining clients, we have selected a team of dedicated professionals to serve as your industry's consultants. These individuals understand the language and key issues unique to your industry and possess the drive and determination to help you manage your company on a proactive basis. |
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New IRS Employment Audits Targeted for Late 2009
The IRS is launching a new compliance examination program focused on employment taxes. Beginning in late 2009, the agency will randomly select businesses and conduct a series of audits to determine if they are properly following a host of payroll tax and compensation-related rules.
The program is part of the IRS National Research Program (NRP), an initiative to improve its compliance programs and better use its resources, and will involve the examination of approximately 6,000 businesses over three years.
Four primary areas the IRS will examine:
- Worker classification: Are you properly classifying workers as employees versus independent contractors?
- Fringe benefits: Are you making the proper adjustment for the personal use of business vehicles and complying with discrimination standards for the various fringe benefits?
- Officer compensation: The IRS is likely pursuing unreasonably low compensation paid by closely held S corporations or excessively high compensation paid by closely held C corporations.
- Reimbursed expenses: The IRS is testing the "accountable plan" rules to determine if actual, documented expenses are being reimbursed versus impermissible flat dollar or percentage allowances.
How to prepare
Businesses should review their compliance before these exams begin. Those with potential issues can shore things up in advance of these audits.
Ask yourself, do you have workers receiving 1099s as independent contractors who regularly perform services under their direction and control? That may raise a question about employee status. And, as a result, some fringe benefits may be discriminatory, because not all employees were properly covered.
"The 'accountable plan' rules will also be addressed. There are some IRS allowances that do permit flat dollar reimbursements, such as the out-of-town meals or lodging per diems. But in most areas, tax-free reimbursements can only occur if there is specific documentation of the business expense by the employee.
How we can help
If you have concerns about your compliance in these areas, we can assist you in a review of your procedures and compliance in these areas.
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Harding, Shymanski & Company, P.S.C. provides accounting, tax and consulting services to clients from offices in Evansville, Indiana and Louisville, Kentucky.
We are committed to quality. Adding value to the services we provide is our most important goal. Our unwavering dedication and commitment to quality resonate throughout every aspect of our work.
Call us today! (800) 880-7800 in Evansville and (502) 584-4142 in Louisville |
| Disclaimer |
The information contained in this email is for general guidance on matters of interest only. This publication does not, and is not intended to, provide legal, tax, or accounting advice. |
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