The National Association of Surety Bond Producers (NASBP) has republished an article written by construction litigation attorney Luke Tompkins.
In "Joint Check Agreements in Construction: Use with Caution," Luke provides an overview of some of the unintended pitfalls of using such agreements in construction projects. From the article:
Construction projects involve a tiered relationship, which consists of (a) the project owner, (b) a general contractor hired by the owner who manages the construction project as a whole, (c) first-tier subcontractors hired by the general contractor to complete discrete portions of the project work, and (d) lower-tier subcontractors and suppliers who are hired to complete portions of the upper-tier subcontractors work or to supply materials to upper-tier subcontractors.
Generally, under this tiered system, the owner pays the general contractor, the general contractor pays each of its first-tier subcontractors from the funds it receives from the Owner, the first-tier subcontractors pay their second-tier subcontractors and suppliers from the funds received from the general contractor and so-on. If, however, a first or second-tier subcontractor fails to pass along payment to its subcontractors or suppliers, then the unpaid subcontractor or supplier can assert its payment and lien rights against the owner, general contractor, and upper-tier subcontractors as provided by North Carolina law. This subjects owners and especially general contractors to the threat of having to pay twice for the same work. Therefore, general contractors have a key interest in ensuring that payment makes its way down to second and third-tier subcontractors.