What are the risks of a contractor requesting joint check agreements?
Understanding Joint Check Agreements
In commercial roofing, a joint check agreement is a three-party contract between the property owner (or general contractor), the roofing contractor, and the material supplier. It stipulates that payments for materials will be made via a check payable to both the contractor and the supplier.
While often presented as a 'security measure' to ensure suppliers are paid and to prevent mechanics liens, the request for a joint check should be viewed as a significant data point in your due diligence process.
Why the Request Matters
A request for a joint check usually stems from the material supplier’s lack of confidence in the contractor’s ability to pay. This typically occurs for three reasons:
- Credit Limitations: The contractor has reached their credit limit with the supplier.
- Payment History: The contractor has a history of late payments or defaults with that specific vendor.
- Business Scale: The project size exceeds the contractor’s current financial capacity or 'bonding' equivalent in open credit.
Operational Risks for the Owner
While a joint check ensures the supplier receives their funds, it does not protect the owner from the operational risks of a financially strained contractor. If a contractor is struggling with cash flow, they may lack the capital to pay for labor, insurance premiums, or specialized equipment needed to complete the project.
Furthermore, joint checks require meticulous administrative oversight. If the check is issued incorrectly or if the supplier fails to provide a corresponding lien waiver upon receipt of the joint funds, the property remains vulnerable to a lien claim despite the payment being made.
Verification Strategy
If a contractor requests a joint check agreement, it is advisable to request a comprehensive financial disclosure or a letter of credit from their bank. A stable commercial roofing entity should typically maintain sufficient trade credit to procure materials without requiring the property owner to intervene in the vendor relationship.
Key Takeaways
- A joint check request often indicates the contractor lacks sufficient credit with material suppliers.
- While it ensures the supplier is paid, it does not mitigate the risk of contractor insolvency during the project.
- Joint checks can complicate the lien release process if not managed with precise documentation.
- Frequent use of joint checks by a contractor may be a sign of poor cash flow management.
Next step
Review our financial due diligence framework to evaluate a contractor's operational stability before signing an agreement.