Subcontractors, Now’s The Time! Protect Yourself from Construction Lawsuits Due to Non-Payment

Posted on February 16, 2018 |

Subcontractors, Now’s The Time! Protect Yourself from Construction Lawsuits Due to Non-Payment

Payment is important in every field. As a subcontractor, the simple matter of payment becomes a lot more complicated and can result in construction lawsuits. There are a variety of reasons why subcontractors don’t get paid for work they do. In some instances, the contractor or owner is bankrupt. Other times it’s a bit more nefarious. And generally, subcontractors have to file construction lawsuits in cases of non-payment. Regardless, it’s important to protect yourself from construction lawsuits from non-payment.

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Mechanic’s Lien

One way of protecting yourself from non-payment and construction lawsuits is a mechanic’s lien. These are usually used by subcontractors and suppliers rather than contractors. A mechanic’s lien is a legal claim against a property. But mechanic’s liens can be complicated. Every state has different laws, and some require the lien to be taken out before the project is completed. However, it does allow subcontractors or suppliers to leverage the property if they aren’t paid for their work. And it is a good way to protect yourself from construction lawsuits.

Contingent Payment

Contingent payment is usually “pay when paid” or “pay if paid” payment. It stipulates that the subcontractor will be paid if or when a contractor is paid by the owner. These clauses are common in contractor-subcontractor agreements. However, they’re difficult on subcontractors. These clauses mean that a subcontractor only receives payment after a contractor is paid. It puts subcontractors in a lurch because they are required to front the costs of a project. They have to pay their suppliers and workers before they might actually see payment. And if an owner doesn’t pay the contractor, then they also don’t see payment.

To protect yourself from construction lawsuits arrange contracts so the contractor must pay you regardless of their payment.

Suspending Work

Another option before taking a contractor or owner to court is to suspend work. Every state has different suspension laws, but it’s a less aggressive step then permanently stopping work for breach of contract. The Virginia case Manganaro Corporation v. HITT Contracting, Inc discussed just that. Manganaro Corp decided to suspend work after HITT Contracting wouldn’t pay invoices. The judge found that Manganaro had the right to suspend work because HITT Contracting wasn’t keeping a reasonable time for payment.

Now, not every state allows this option and some contracts prevent subcontractors from suspending work. If subcontractors aren’t being paid suspending work can change the case. However, they should consult legal counsel first. And the suspension of work because of non-payment should be an option in contracts because it’s a way to resolve issues without construction lawsuits.

Prompt Pay Laws

Subcontractors can use prompt pay laws to secure payment or back payment in some states. Prompt pay laws do require subcontractors to take owners or contractors to court. These laws require contractors to pay subcontractors within a certain number of days after receiving an invoice. If a contractor or owner doesn’t pay within the amount of time, then a subcontractor can serve notice to either take them to court or to leverage the lien.

Securing Paperwork

If you have to file a construction lawsuit, it’s important to have documentation. Having every single slip of paper related to the project is imperative. Subcontractors have to have their contract, any invoices they’ve sent to the contractor, and any invoices or payroll the subcontractor created. All of this paperwork helps in lawsuits because it shows the scope of the issue and can be used to explain charges.

Having all of your paperwork in a secure location that can be easily accessed also helps if charges are questioned. If a contractor or owner refuses to pay an invoice because they don’t understand it, you can provide documentation to explain every part of the charge. This can help disputes end before they become construction lawsuits.

Federal vs. Civil Contracts

All of these options mostly benefit civil contracts. And federal contracts can be trickier to navigate. Contractors bid on federal jobs, then hire subcontractors. So contractors are generally at fault if a subcontractor doesn’t receive payment. However, with federal jobs, there is no way for a subcontractor to get a lien on the property. So if a contractor doesn’t pay them, it can be difficult to retrieve payment without a construction lawsuit. While laws like the Miller Act of 1935 allow subcontractors to take civil action against contractors, it’s only on projects where they’ve supplied more than $150,000 worth of labor or materials. If subcontractors meet those qualifications, they can file a construction lawsuit against the contractor’s bond. This can help them recover some of the wages.

It can be very hard to recover wages and other expenses on projects as a contractor. Which is why it helps to have an airtight contract to help secure wages.

Disclaimer: This is article is for informational purposes only and cannot serve as tax, legal or accounting advice. Readers should consult a tax, accounting, or legal professional regarding their specific financial or legal situation. See full disclaimer here.