Every state has different laws concerning nonpayment, a subcontractor needs to consult a lawyer to see your options.
You’ve put in the hours and resources into a project, but in the end, the general contractor doesn’t pay you for your work. It’s every subcontractor’s nightmare, at the end of a project they don’t hear anything from the general contractor anymore. Subcontractors have more tools than ever to ensure payment from general contractors. Between the tools at their disposal and state and federal laws there are ways for subcontractors to remedy nonpayment.
There are several reasons why contractors don’t pay their subs. While it might feel like it’s intentional that’s not always the case. Sometimes the owner or contractor on the project goes bankrupt during the project, which prevents them from paying subcontractors. Sometimes contractors are behind on their payments and use money from a current project to pay subcontractors on their last project. Occasionally the contractor is withholding payment because they are refusing to pay. All of these incidents are not only unfair to subcontractors but depending on the laws within a state they aren’t always legal. However, these laws also govern how a subcontractor can get payment from the contractor.
One way subcontractors can protect themselves is through a mechanic’s lien. A mechanic’s lien is a legal claim against a property that the subcontractor was working on. But they can be complicated based upon the state that the project is in. The laws might require subcontractors to take liens out before the work is completed, or it might allow for subcontractors to take out a lien whenever. Some contractors are putting clauses into their subcontractor agreements that prohibit subcontractors from taking out a mechanic’s lien if they aren’t paid. Before entering into a contractor-subcontractor agreement, first, see if there is a clause or stipulation against that.
Contingent payment is becoming commonplace in contractor-subcontractor agreements. These are clauses that say “pay when paid” or “pay if paid”. These stipulate that once the contractor is paid they will pay the subcontractor. While these clauses are becoming more popular in subcontractor agreements, they aren’t beneficial to subcontractors in the slightest. And in some states, they aren’t legal. Always check with a lawyer to determine the validity of such clauses in the state the project is in, and avoid contracts with contingent payment. Instead, set payments associated with milestones, or other features to ensure payment.
Using Payment Bonds
Owners occasionally ask general contractors to get payment bonds. The payment bond is backed by a surety company, and protects the owner and subcontractors. If a general contractor doesn’t pay his subcontractors, they can make a claim against the payment bond. The surety company will pay out the subcontractors for at least part of their money and take the contractor to court. One of the benefits to subcontractors is they usually have a longer window of time to make a claim against the bond. Many times it is up to a year after the last time they worked on the project, which can make it an easy way to get something back.
One of the final ways to try to receive payment from the general contractor is through a lawsuit; however, going to court costs money. If the subcontractor wins, the judge might order the general contractor to pay their legal bills. And in states with “prompt pay” laws, it is easier on the subcontractor than the general contractor. “Prompt pay” laws give a certain number of days after the contractor receives a receipt to pay their subcontractors. If they don’t they are breaking the law. While this is just one of the laws that subcontractors can use to receive payment, a lot of it depends on the contract and if there is a clause that ties subcontractors to binding arbitration or if they’re allowed to sue.
In order to be able to receive payment for anything you do, you have to document it. Even if a case goes to court, you aren’t paid on what you did, but what you documented. That’s why it’s so important for subcontractors to use a construction project management system. In the case of nonpayment, it’s easier to find all documents and communications related to the project.
Many project management solutions let subcontractors keep separate folders depending on the project, so all documents are in one folder. And great project management solutions also will keep records of communications sent and received. That way there isn’t a scramble to find every piece of communication related to the project.
Subcontractors have more tools than ever to help document all of their man hours and labor on a project. When subcontractors use those tools they help ensure payment from their general contractor and stop nonpayment.