By: James K. Zahn
Assume for the moment that you are the architect about to begin performing “Construction Administration Services” for a project on behalf of an owner. The owner wants a smoothly run project and looks to you for advice in making that happen. The project has been bid, the owner has selected a contractor, an “Owner / Contractor Agreement” has been fully executed, and the project’s contract price has been established. As the architect, and before you begin your normal construction administration services, you may want to recommend that the owner engage the services of a title company to set up the owner’s construction escrow account in order to monitor payments from that account during the entirety of the construction project.
The cost of the title company’s involvement in the construction process is minimal in comparison to the untold additional costs and potential headaches that the title company may be able to alleviate. Contractors, subcontractors and material suppliers all welcome the involvement of a title company. Subcontractors and material suppliers will most likely possess an increased level of confidence knowing that they will receive their payments when the title company is actually administering all progress and final payments. It is not unheard of that a contractor receive a progress payment, but for whatever reason, none of his subcontractors and material suppliers are paid their share for their prior work performed or materials supplied. The title company can immediately intervene when the contractor is keeping money that belongs to his subcontractors and materialmen, by withholding further payments to the contractor until the subcontractors and material suppliers are paid.
The title company will make sure that all prior and current paperwork is properly submitted before any payments are made to the contractor, subcontractors or material suppliers in situations where payments are made directly by the title company to lower tier subcontractors and materialmen. They will keep track of any changes to the overall contract price to construct the project. The line item amounts indicated on the contractor’s sworn statement for its subcontractors and material suppliers will be reviewed and kept in balance by the title company with reference to the overall contract price. Additionally, contractors will be less likely to adjust line item amounts without explanation, knowing the title company will question them as to the change. The title company will keep the contractor honest.
Before any payments are made by a title company, appropriate “Waivers of Lien to Date” or “Final Waivers” must be supplied by the contractor–or in the case of direct payments–by its subcontractors or material suppliers, which release mechanics lien rights against the owner’s property for the amount of the payment requested. This waiver process is how the title company protects an owner from mechanics lien claims for amounts already paid out by the title company.
As the construction and payment process continues towards completion, the title company is constantly watching the outflow of the owner’s construction escrow funds and simultaneously making sure the owner is protected from future mechanics lien claims by collecting proper partial and final waivers of liens from all of the contractors, subcontractors and material suppliers receiving payments for work or materials supplied for the project.
An architect is capable of providing the same services, but to do so properly requires skill and attention. This is a time-consuming process, but a process that needs to be competently performed on every project. The title company’s services are well worth the fee that the title company will charge. Additionally, the title company is always aware of the exact status of the owner’s title, immediately aware of any mechanics liens that have been filed against the owner’s property. This is a service that architects cannot easily perform.
If a contractor receives a progress payment and fails to pay his subcontractors and material suppliers whose line items constituted a portion of that draw request, the subcontractors and material suppliers still retain their mechanics lien rights against the owner’s property. If a title company is not involved, and no-one is watching the store, an owner may unfortunately find himself in the undesirable position of having to pay any unpaid subcontractors and material suppliers again for their work and materials, even though he previously paid the contractor these same services. This exact situation is the cause of many lawsuits for breaches of contract and mechanics liens foreclosures. Architects are not as well equipped to prevent this situation from occurring as are title companies. Title companies deal with these payout issues every day and are not as likely to put up with a contractor mishandling progress payments which mysteriously fail to make their way down to the unpaid subcontractors and materials suppliers who actually provided the work and/or materials for the project.
A title company will usually be liable for any payments made by them without corresponding partial or final waivers of lien. This is what title companies do; they protect and insure the owner’s interests in the construction payout process. They are also the most likely to know the exact financial standing of the project. Title companies keep track of exactly how much money was previously paid out, how much is currently due to be paid out, and how much is still being held in the construction escrow to finish the project–all funds down to the exact penny. With a title company’s involvement, the owner and architect will always know exactly where the overall project cost stands.
The accounting system established by the title company will also aid the architect in performing his other construction administration services. The architect can better evaluate submitted contractor’s applications for payment with confidence, knowing how much money is still being held in the construction escrow account to finish construction. The title company is the one source of consistently accurate project financial information, including accurate knowledge of the Owner’s clear or clouded title.