NON-PAYMENT IS A THREAT TO MOST SUBCONTRACTORS’ AND SUPPLIERS’ BOTTOM LINES – especially if you are providing labor and supplies for construction projects. Knowing who you can collect from, what tools for recovery are available, and being proactive to minimize disputes, can make a difference.
COLLECTING FROM THE GENERAL
- GET IT IN WRITING. Have a written contract with the General Contractor that includes, at minimum, the scope of work, deadlines for performance, and a payment schedule. This will reduce disputes about the scope of work or fees, and provide leverage if the general is slow to pay.
- REQUEST ATTORNEY FEES. Include a provision in your agreement that entitles you to attorney’s fees and costs of collection. In Iowa, you can only recover attorney’s fees and collection costs if you include a clause providing for a collection right if you pursue legal action for payment.
- INCLUDE A PROVISION TO STOP WORK FOR LATE PAYMENT. Your written agreement should include a payment schedule throughout the project timeline that allows you to stop performing services or suspend the job if payment is not made when due.
- KEEP UP WITH CHANGES. Insist all change orders are in writing and update the agreed scope of work as the project changes. It is common for a sub to be hired for a certain task and to be later asked to do more and more work. It is difficult to recover for undocumented work requests. Indicate when payments are due for change orders, and do not make additions to projects without written change orders. Ask yourself: is the value of the services I perform worth five minutes to fill out a change order or send an email to confirm the request?
- INVOICE. Invoice on a regular basis and keep proper accounting of your job.
COLLECTING FROM THE OWNER
A mechanic’s lien may be the best collection option. To accomplish this, file a lien against private property where they furnished labor and/or materials. Mechanic’s liens are available to contractors, suppliers, design professionals, surveyors and other tradesmen who provide a permanent improvement to the residential property. Note that maintenance work such as yard work and snow removal are not considered permanent improvements. A mechanic’s lien creates a security interest in the property for the unpaid part of the contract price. The property value secures the obligation to the unpaid tradesman, who can file a foreclosure suit to enforce the lien. Successful claimants can obtain an order requiring the sheriff to sell the property to satisfy the lien. Keys to remember in filing a mechanic’s lien:
1) FILE A PRELIMINARY NOTICE AT THE BEGINNING OF A JOB. Subcontractors working on residential projects must post a preliminary notice. All lien related documents must be filed on Iowa’s online database called the Mechanic’s Notice and Lien Registry. Subcontractors and suppliers can create a user account, conduct a lien search, and electronically post documents in the Registry found on the Iowa Secretary of State Office’s website at: https://sos.iowa.gov/mnlr/search/search.aspx.
2) SEND NOTICE TO OWNERS. Send notice of the lien to the owner by certified mail. Notice must be provided to owners before the owner fully pays the general contractor, or the subcontractor’s lien rights are lost. General contractors working on residential projects must post a notice of commencement and provide notice to owners within 10 days of beginning work, or lien rights are lost.
3) RECORD LIENS AND VERIFIED STATEMENTS WITHIN 90 DAYS. Contractors and subs must file liens within 90 days from the last time work was performed. After 90 days, a sub can still file the lien and verified statement of account, but then the owner only owes the subcontractor to the extent that money is owed to the general contractor at the time the lien is filed.
Mechanic’s liens are an excellent tool for getting paid, but the filing rules are specific.
This article intends to provide general information on precautions and collection options for construction professionals to recover payment for performed work. This article is not legal advice. There are many nuances to the filing of liens, and it is recommended to consult an attorney before filing a lien, or if a lien is filed against your property.