Understanding & Managing the Risks of Non-Payment
by Trent Cotney, partner, Adams & Reese, LLP
(Editor’s Note: Trent Cotney, partner at Adams & Reese, LLP, is dedicated to representing the roofing and construction industries. Cotney is General Counsel for the Western States Roofing Contractors Association and several other industry associations. For more information, contact the author at (866) 303-5868 or go to www.adamsandreese.com.)
As a contractor, you rely on being paid. After all, if you fulfill the requirements of your contract and perform on time, you expect compensation on time, too. However, if you work on residential projects, you may already understand the issues related to delayed payments or non-payments. It can be frustrating and concerning when you expect payment but it does not materialize. You need to pay your suppliers, subcontractors, and workers, but if the owner fails to pay you, that can be challenging.
The current economic atmosphere has hit many people hard, including owners. They can sometimes face insolvency without apparent warning, which can impact your livelihood. It is essential that you can recognize the signs of trouble and know how to react to them.
Start with the Contract
Before you take on any new job, pay careful attention to the contract. It addresses your rights and responsibilities, and the language is critical if you find yourself in a dispute. For example, some contract provisions can reduce your exposure to untimely payments. Your contract should include descriptions of the project payment type, including unit price, lump sum, cost plus, or cost plus with a guaranteed maximum price. The contract should explicitly note the timelines and procedures for periodic and final payments. These details include the billing cycle, the owner’s review period, and the payment deadlines.
In addition, the contract should include terms for the change order process in case revisions are needed. Stipulations should also outline your rights if payments are late. These include a stop-work provision, allowing you to halt operations without being considered in default. A clear contract can avoid confusion and conflict during your project.
Watch for Warning Signs
When you enter into an agreement, you expect that the other parties will uphold their responsibilities. Even if you trust the owner from the outset, you must be alert. You should be aware of the warning signs of non-payment. For example, if the owner suddenly makes a partial payment or delays a payment, that could indicate that the owner is facing financial troubles. There may also be a problem if the owner suddenly stops communicating with you. Keep an eye on the market conditions in your area and make it your business to know how well the owner is managing other projects. If you are aware of the overall outlook, you may be able to spot problems before you progress too far with your work.
If you begin to suspect that the owner is having financial difficulties, be sure to communicate. Talk to the owner, find out if there are problems, and see what solutions there could be. It is better to be open about your concerns than to be suspicious and unsure if you should continue working on the project. By opening a discussion, you and the owner may be able to renegotiate payment schedules and other terms. However, if you are nearing the end of a project and are concerned you may not receive final payment, you may want to explore ways to secure that debt.
Explore the Mechanic’s Lien
A mechanic’s lien allows you to put a lien on the property where you were performing work as a way for you to secure unpaid debts. It is a powerful tool for you to ensure payment. Using a mechanic’s lien, you have the right to collect proceeds when the property is sold. The owner would be unable to sell the property without settling your debt first. However, if you do not file the lien properly or in a timely manner, you may lose your rights. The details of a mechanic’s lien can vary from state to state, so it is critical that you understand your state’s laws.
Before you sign any contract, make sure that its provisions protect your rights in the event of non-payment. During the course of a project, make every effort to monitor the owner’s payment habits. Keep the lines of communication open, and provide solutions if you begin to see problems. However, if you realize that you are at risk of non-payment and your owner is not communicating, do not hesitate to seek legal counsel. An experienced construction attorney can review your contract and your situation, then help you determine the best steps to protect your rights.