Taking deliberate steps and paying close attention to contract dates and language will increase the likelihood of getting paid for your work. Thinking about and planning for these steps before you sign a contract will likely benefit your bottom line.
Understand Your Contract
Usually, it’s one sticky contract provision that prevents timely payment – or any payment – to a subcontractor: the pay-when-paid clause. In nearly every contract, pay-when-paid is valid and enforceable.
This contractual provision attempts to shift the risk of owner nonpayment from the contractor to the subcontractor. To deal with it, you must understand it. Put simply, with this clause, a contractor who hasn’t been paid by the owner does not have to pay a subcontractor. This is a legal defense to non-payment. So, if you see this, how do you deal with it?
First, you could try to strike or modify the provision. That’s unlikely to happen as this is a contractor safety net which most are usually unwilling to lose.
Next, you can add a “stop-work” provision to your contract. This doesn’t eliminate the risk, but it does lessen it. Without a stop-work clause, you as a subcontractor must keep working and paying suppliers, laborers, and overhead – even if you are not getting paid. You can proceed with the dispute resolution procedures that are in your contract, but the financial bleed won’t stop while you try to negotiate, arbitrate, or litigate. That happens with this sort of language:
“Subcontractor shall not be entitled to stop the work on account of a Contractor’s Default, including nonpayment, but shall proceed with the dispute resolution procedures in this Agreement.”
When that happens, consider amending your contract with this one sentence:
“Subcontractor may slow or suspend work if any payment requests have not been paid in full within 30 calendar days from submission.”
A contractor may insist on 45 or 90 days, but the important thing is having the ability to stop work at some point. Again, this doesn’t guarantee payment, but it’s critical in stopping the financial hemorrhaging.
Secure and Assert a Lien Claim
An owner can’t stand behind the pay-when-paid defense when you have asserted a lien claim. If you aren’t paid, and you have a lien, on the property, you can sell or foreclose on the property to get paid. The right to lien doesn’t guarantee you will get paid, but it mandates that if there’s equity in the property, you are entitled to it, in line with other lienors.
To have lien rights, the contract price between the owner and the contractor must be greater than $2,500. You must also adhere to these specific lien statute requirements to “perfect” your lien rights.
- Serve a Notice to Owner to all interested parties no later than 45 days from the first labor or furnishing of materials per the contract.
- Record a Claim of Lien no later than 90 days from the last day of work or material delivery.
- Serve a copy of the Claim of Lien to all interested parties within 15 days of recording the lien.
- File a lawsuit to enforce the lien, called foreclosing, within one year from the date of recording the Claim of Lien.
The “days” mentioned are calendar days including each weekend day and legal holiday. Start counting on the day after the day you deliver the materials. If the last day falls on a weekend or legal holiday, the deadline will roll to the next non-holiday weekday.
Be mindful to count by days and not months, as not every month has 30 days, and counting that way can lead to inaccuracies and missed deadlines. Also be aware that warranty and punch-list work is not considered last work, while approved change order work is.
A Claim of Lien can be amended at any time during the original 90-day period allowed for its recording, so long as that alteration isn’t detrimental to anyone who relied upon the original Claim of Lien.
Secure and Assert a Payment Bond Claim
A bond is another instrument that secures the lienor’s right to payment. Instead of a claim on the property, the lienor has a claim against a surety/payment bond. The surety can’t use the pay-when-paid clause to keep from paying you. Almost every public job, and some private jobs, are bonded by the contractor. (Note: In Florida, a conditional payment bond requires that you pursue both lien rights and bond rights.) Like the lien process, there are specific steps to follow to pursue payment:
- Determine whether a project is bonded by looking at the Notice of Commencement, or the public records where the project is located. A noticing service also provides this information.
- Serve a Notice to Contractor either before beginning or within 45 days after beginning to furnish labor, materials, or supplies. This lets the contractor know you will look to the bond for protection. If you are in direct contract with a bonded contractor, this notice isn’t necessary, but it’s still recommended. It’s a best practice and good security to notice any job over a certain dollar amount.
- Note any failure to record a Notice of Commencement, or reference the bond. A lienor has 45 days from the date of being notified of the bond’s existence within which to serve the notice. If the recordings are not done per the law, you may have more time. A construction attorney can explain this and other exceptions to the rules.
- Serve a Notice of Nonpayment to the contractor and surety no later than 90 days after providing final labor, services, or materials.
- File a lawsuit to foreclose no later than one year from the last day of work or delivery of materials to the project.
Though you technically have a year, it’s never advisable to wait that long to bring suit. It’s recommended to file suit from 60 to 90 days of serving a Notice of Nonpayment. If you haven’t been paid by then, it’s unlikely that waiting longer will get you paid.
Exchange a Conditional Release for a Check – Carefully
Contractors can lose rights because they release more than they intend to, especially when accepting partial payment. Use the statutory form found in Chapter 713. It’s about four sentences and can also be found at www.TheLienZone.com/forms for free. However, if you signed a contract that specified a certain type of release, you must use that one. Negotiate this before signing a contract.
- Understand exactly what you are releasing with your signature. Make sure the amount of time and money being released match up. For example, if you sign a release accepting $30K of the $50K you are owed, and you are releasing rights to be paid the rest of the month, you will be out the other $20K. Sign a release to receive that $30K, but make sure the date reflects the week or two that money accounts for, not the whole month.
- Don’t judge a form by its title. If a page announces, “Partial Release,” don’t assume you have more rights still to come. The stated dates are what matter.
- Account for retainage, pending change orders, and other claims. If you don’t, you may be unwittingly giving up payment that should be yours.
It’s important to protect yourself against nonpayment as much as possible before signing any contract. But just as critical is knowing the options, remedies, pitfalls, and deadlines involved in the path to getting paid.