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Public-Private Partnerships: Can You Unravel the Red Tape and Get Paid?

Scissors Cutting Red TapeConstruction projects across the nation — and in Colorado — are picking up as leaders of municipalities of every size are looking to upgrade infrastructure and provide enhanced public services. To finance these major projects, many public agency decision-makers partner with private-sector company leaders. These public-private partnership, or P3, projects provide a growing area of opportunity for contractors and subcontractors.

However, because of the complex nature of these partnerships and the contracts involved, P3 projects can also create a giant ball of red tape for credit account managers who are trying to collect payments. Credit managers must understand the nature of the contracts they are working with so that they know which tools they can use to protect their interests and ensure prompt payment for their services.

Mechanic’s lien, public bond claim, or none of the above?

Question: How does a mechanic’s lien apply in a P3 project?

Answer: It might not.

Experienced credit managers understand that mechanic’s liens can be applied to private projects and privately owned property but public entities essentially have immunity. To use a mechanic’s lien, the project must be generally considered a private project.

Expert legal counsel Orlando Lucero provides a summary in a Probate and Property1 article. He narrows down the choices this way:

  • If the project is considered a private property interest, the mechanic’s lien will attach as with any other private project.
  • If the project is considered a public property interest, mechanic’s liens will not attach and the materials and labor suppliers must rely on claims against public payment bonds.

But of course, there are always loopholes. In a Construction Executive2 article, lien expert Nate Budde explains that in some instances, public projects that involve a private company operating the project after its completion (e.g., a toll road) have been deemed primarily “private.” Even a public project might not be public “enough” for a public bond claim.

You see where this can get confusing. Budde says that choosing the right tool in your collections toolbox requires understanding many factors, including:

  • Who is the underlying property owner?
  • Besides the underlying owner, does anyone else have interest in the property?
  • Where did the project funding come from?
  • What do the improvement contracts say?

Once you are able to trace these threads, you’ll be able to more clearly determine how to pursue payment. Even then, the answer might not be completely clear.

Know where you stand before you start

Because P3 projects present such knotty puzzles for credit managers, it’s essential to understand the true nature of your agreement before you enter into the contract.

Ongoing review and education about the ins and outs of mechanic’s liens and other collection tools is essential for everyone on your credit management team — from the most experienced experts to the newest members. Join MSCCM and Jean Arnold, of Arnold & Arnold LLP, at our upcoming Mechanic’s Lien Seminar and get the scoop on what to look for in your contracts to ensure a mechanic’s lien is the right recourse.

Save the Date - Mechanic's Lien Seminar, Friday, April 22, 2016. Click here to register.

Footnotes:

1 Lucero, Orlando. “Public-Private Partnership Projects: Insuring the Lender’s Lien Priority and Ensuring That the Contractors Are Paid.” Probate & Property, Vol. 27, No. 04. American Bar Association.

2 Budde, Nate. “P3 Projects and Lien Waivers: Are They Applicable or Necessary?” Construction Executive. 5 Feb. 2015.

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