By Joseph Kanfer, Woolford Kanfer Law, PC

One of the most important things a subcontractor can do to plan ahead is to have a plan to get paid on their projects when their customer does not pay on time.  Many subcontractors do not start thinking about what steps they might take to get paid until a customer is seriously delinquent on payment.  However, subcontractors who are not familiar with their options for seeking payment, the steps they need to take for each of those options, and the applicable time limits may find their options limited.  Talking to an experienced construction lawyer about the law in states where you do business and familiarizing yourself with your subcontracts can help you plan ahead to maximize your options to get paid.

Start with Subcontract Negotiations

Having a plan to get paid starts with subcontract negotiations.  Resist harsh payment terms such as pay-if-paid clauses that condition your right to be paid on your customer receiving payment. This pertains to progress payments and change order work.  Insist on payment within a specified number of days (e.g. 30 days) from invoice.  Require a provision allowing you to stop work if timely payment is not made. Insist on interest for late payments.  Act quickly to assert your rights if timely payment is not made.  Insist on retainage reduction when your work is 50% complete.  Notify your customer of your intention to stop work and its obligation to pay interest if the payment delinquency is not cured.  Insist on payment in full less the value of any incomplete when your work is substantially complete.  The ASA has suggested contract provisions for all these subjects on its website.

Plan Ahead to Protect Your Mechanics’ Lien Rights

One of the most powerful tools a subcontractor has to get paid is the mechanics’ lien.  A mechanics’ lien – known in some states as a construction lien – is a lien that an unpaid subcontractor can put on the land where the subcontractor performs construction work.  Every state has its own mechanics’ lien law, and mechanics’ liens vary dramatically between states.

Every state has a series of steps that must be taken in order to create a valid mechanics’ lien.  There are strict time limits for each of these steps.  Many states require some or all subcontractors to file or serve a preliminary notice – the name varies by state – at the beginning of a project notifying the owner that the subcontractor is working on the project.  There is usually a strict time limit for when this notice must be provided, and a subcontractor who fails to provide the required notice may end up with limited or no lien rights.

Some states also require subcontractors to send a notice of intention to file a lien after performing the work for which they are seeking payment but prior to filing the actual mechanics’ lien.  Where required, there are strict time limits for when and how these notices must be given.  Finally, each state has a time limit for filing the lien itself.  As with other aspects of mechanics’ liens, these time limits vary widely from state to state but can be as short as a few weeks after the subcontractor completes its work.

Importantly, because of the powerful remedy that they provide, deadlines and other technical requirements for mechanics’ lien laws are usually strictly enforced.  Failing to send a required notice or being even a day late with one of the steps required by the law often results in the lien being completely invalid.  Depending on the state, mechanics’ liens may also be unavailable to certain classes of subcontractors (such as lower-tier subcontractors or suppliers) and are often limited – if they are available at all – on public projects.  It is therefore important for subcontractors to be familiar with the lien laws in all states where they perform work.  The best way to make sure you do not miss any requirements is to talk to a construction lawyer who can explain the lien process in your state and help you prepare your lien.  Knowing the requirements for a lien can help ensure that you start the lien process early enough instead of waiting until it is too late.

Act Early Before Making a Payment Bond Claim

Payment bonds are another powerful tool to help subcontractors to get paid.  A payment bond is a bond issued by a surety to a general contractor on a construction project to guarantee that subcontractors and suppliers will be paid for their work in accordance with their contracts.  General contractors are often required to post payment bonds on public construction projects.  On federal projects, a law called the Miller Act requires general contractors to post payment bonds on most projects over $100,000.  Most states have their own laws requiring payment bonds that are often known as Little Miller Acts.  Payment bonds are also sometimes used on private construction projects.

Payment bonds usually have detailed requirements that subcontractors must meet in order to make a claim on the bond, and subcontractors may need to act quickly to protect their rights to make a claim.  Bonds issued under the federal Miller Act, for example, require second-tier subcontractors (who contracted with one of the general contractor’s own subcontractors) to provide certain notices within 90 days of their last day of work.  If a second-tier subcontractor does not give the required notice, the subcontractor loses the right to make a payment bond claim.  Bonds issued under state Little Miller Acts and bonds on private projects often have their own provisions requiring notice to be given in a short period of time, but these vary depending upon the language of the bond which must be carefully studied.

Another obstacle subcontractors often face in making payment bond claims is getting a copy of the payment bond.  On federal projects, the Miller Act allows contractors to request a copy of a payment bond from the contracting agency.  State Little Miller Acts have their own provisions for requesting a copy of a payment bond.  Even bonds issued on private projects, such as the frequently-used AIA payment bond form, often provide for subcontractors to obtain copies of the bond by making a request to the owner or general contractor.  On projects where the general contractor has posted a payment bond, a subcontractor should request a copy of the payment bond early on in the project to be familiar with the requirements for making a bond claim and prepared to act if necessary.

Know the Rules for Contract Claims

Subcontractors seeking payment can also file a contract claim, but the steps for filing a claim vary depending on the terms of the contract, the type of project, and the state where the project is located.

Construction contracts usually contain dispute resolution provisions that specify where and how a contractor must file a breach of contract claim (once the other contractual requirements for making a claim are satisfied).  Some contracts require that breach of contract and other claims be resolved by litigation.  These contracts may specify the particular court where a claim must be filed, but these provisions may not always be legally enforceable.  Other contracts require that contract claims be submitted to mediation first.  These provisions may have specific timing requirements, so it is important to read and be familiar with your subcontracts.  All contract claims are subject to laws called statutes of limitation that require that claims be filed within a certain time or be lost forever.  It is important to know these time limits as well.

Most subcontracts also have specific provisions requiring subcontractors to give notice of claims for additional work, increased costs, or additional time during the course of the project.  These notice provisions vary widely depending upon the subcontract used, but some contracts require that notice be given within a very short window – sometimes within just a couple of days – of the event giving rise to the claim.  It is well worth your while to familiarize yourself with the claims provisions in every one of your contracts because failing to follow the requirements for giving notice of a claim can result in you waiving your right to payment for additional work or to extend the contract time.

Contract claims against public owners may need to be submitted to a special administrative process in some states.  These processes are often convoluted, require multiple steps, and can be difficult to navigate.  The deadlines for these claims are often extremely short, so it is particularly important to be familiar with the requirements for filing a claim for the type of project you are working on.  An experienced construction lawyer can help you navigate the claim process.

Talk to a Construction Lawyer

Subcontractors who are not paid for their work have several options to collect payment.  However, all of these options have time limits for the subcontractor to act and many require a subcontractor to act early to protect their right to payment.  Subcontractors should therefore read their contracts and talk to an experienced construction lawyer to understand the law so they can have a plan to get paid before they need it.

About the Author

Joseph M. Kanfer is a partner at Woolford Kanfer Law, P.C., with experience litigating a wide range of complex business, construction, and other disputes in both state and federal courts. He has also argued cases before the Superior Court of Pennsylvania, the Commonwealth Court of Pennsylvania, and the United States Court of Appeals for the Third Circuit.

Woolford Law provides a wide range of legal services to its diverse client-base, which includes general contractors, subcontractors, homebuilders, real estate developers, municipalities, design professionals, health care professionals, manufacturers, distribution companies, professional services firms, retailers, and communications firms. Click here for more information on Woolford Kanfer Law PC.