Saturday, November 01, 2014

How to Get Paid When You’re a General Contractor

Image courtesy of satit_srihin at

The #1 complaint that I hear from contractors is that they have trouble getting paid.  They provide a service to an owner, do additional work when asked, and then when an owner is presented with a bill, the owner ignores it, pays less than asked or refuses to pay at all.  What is a contractor to do?

Here are the rules for getting paid:
  1. Start with a good payment schedule. The payments should be linked to milestones so the work does not get ahead of the payments or vice-versa.  Ask for payment at the start of a milestone to ensure reasonable cash flow.  For example: 10% at the start of plumbing.
  2. Ask for a reasonable deposit. Make it enough money to ensure payment for custom materials and make it non-refundable.  If you are a home improvement contractor in Massachusetts, the deposit cannot be more than one-third, and you have to include language in your contract stating that fact.
  3. Include a provision in your contract that allows you to stop work or suspend the job if a payment is not made when due. For that reason, make sure that the payment schedule is broken down into more frequent payments.  That way, if one is missed, it will only constitute a small percentage of the job.
  4. Charge finance charges. As long as your state allows you to do so, charge finance charges for late payments. You can also include a discount for immediate payment if you would like.
  5. Include a provision in your contract that entitles you to attorney’s fees and all costs of collection. In Massachusetts, you can’t get your attorney’s fees back if you don’t include a clause in your contract saying that you have a right to them if you have to pursue a customer for payment.
  6. Consider having a “pay when paid” clause with your contractors. Unless you are working on a commercial job in MA that is >$3,000.000.00, you have a right to wait to pay your subcontractors until you are paid.  This may not be great for your relationship with your subs, but it will put pressure on the owner to pay you.
  7. Insist that all change orders are in writing and reflect the change in contract price. In addition, indicate in your contract when payments are due for change orders.  Then, do not make any additions to projects without written change orders!
  8. State in your contract who will have the authority to sign change orders. If the owner asks others for change orders, make sure the owner understands that he will have to pay for all unauthorized change orders.
  9. Invoice on a regular basis and keep proper accounting of your job.  Guess how many owners are willing to pay for change orders that a general contractor discovers after final payment has been made.
  10. Finally, if all else fails, make sure you are in compliance with the timing of your state’s law for filing mechanic’s liens. Mechanic’s liens are an excellent tool for getting paid, but the rules for filing them are usually very specific, so consider hiring an attorney so they are done properly.
Next up:  How Subcontractors Can Make Sure They Get Paid.

Sunday, September 15, 2013

What to Do When Subcontractors and Suppliers Ask the Owner for Payment

Stacks of One Hundred Dollar Bills with Small House.
When owners discover that their contractor has not paid subcontractors and suppliers, anxiety immediately sets in.  Contractors who are not adept at running their businesses end up with cash flow problems and operate on credit.  The situation then catches up with them and they stop making payments.  Suddenly the owner finds himself being contacted by subcontractors and suppliers who are demanding payment. 

The law in Massachusetts is clear; a subcontractor or supplier can only collect against an owner if it records a properly perfected mechanic’s lien.  Then he can only expect payment to the extent that money is owed to the contractor at the time the lien is filed.  That said, the owner has the right to finish the job.  If there are no funds left, the subcontractor or supplier can only go after the general contractor for payment.

Mechanic’s liens are complicated.  They consist of two documents: a Notice of Contract and Statement of Account.  After filing these documents, the sub or supplier must file suit within 90 days, or the lien is no longer valid.  Contractors and construction companies frequently fail to properly perfect or record their liens.  If this occurs, they may be dismissed.

Generally, in MA, liens must be filed within 90 days of when the general contractor or someone working through him was last at the job.  If an owner pays subs during the period that others can still record liens, he “pays them at his peril.”  For that reason, the owner should record a Notice of Termination with the Registry of Deeds.  That starts the clock running and all liens must be filed within 90 days of the recording.

At that point, the owner has a decision to make.  Should he file a motion to dismiss the lien because no money is owed to the general contractor, or negotiate with the sub or supplier and pay them something to dissolve the lien?  Unfortunately, the answer is, it depends.

In order to have a lien dissolved, your lawyer has to file an application to dissolve the lien with the court, and schedule a hearing.  The whole process may take ten hours or more of your attorney’s time.  As with any matter before a judge, there is no guarantee that the decision will go your way, even if the facts are on your side.

If the sub or supplier will agree to a smaller amount to pay the general contractor’s debt, it may be worth it to pay and have him sign a release.  This may be a preferable and perhaps the only option if the subcontractor still has work to do, or if additional supplies are needed from the same supplier.  It is generally more expensive to hire someone new to come in and complete work that has been started by someone else.

On the other hand, the amount owed may be so large that it is more economical to fight it out in court.  If money is still owed to the general contractor, then that amount will be distributed pro rata to the subs who have filed properly perfected liens.  Unless one can get all of the subcontractors to agree, it is better to obtain a court order decreeing the amount owed and how it should be distributed.

It is extremely stressful for an owner when subcontractors and suppliers start knocking on his door. Given the complexity of the situation, it is advisable for an owner to contact a construction attorney to determine how to best resolve the matter.

Friday, August 02, 2013

How to Handle Micro-Managing Homeowners

I assume that some of the contractors out there are already nodding their heads.  The Internet has done a lot of good in the world, but in certain ways, it has not benefited home remodelers.  The access to information allows anyone to research products and methods in construction, and unfortunately, a certain percentage of the public concludes that they have developed a level of expertise that trumps that of their contractor's.

I have heard numerous complaints from home improvement contractors who now deal with homeowners who want to buy their own materials (they can get a better deal, they want something unique), have their contractors use different methods, or finish a task within an unreasonable amount of time. I am sure that the customers mean well, but interference from their clients can be a real problem for contractors and at its worst, derail a project or result in litigation.

How can a construction professional avoid getting stuck with micro-managing (albeit well-meaning) homeowners?

  1. Pre-screen your customers.  Most of my clients tell me that they saw red flags prior to signing a contract, but did not pay attention to them.  You are the expert; if the client starts out by telling you how to run the job or insisting that he order his own materials and supplies, take notice.
  2. Set expectations.  You are running the project.  Although a homeowner may believe that she can get a cheaper price, most contractors have ongoing relationships with suppliers that allow them to buy at a discount (which they can then mark up) and control the schedule for delivery so it does not delay a project.  If something arrives damaged, these relationships can enable the contractor to replace the item on an expedited basis.
  3. Draft a good contract.  Let the homeowner know that you will be taking a markup on your materials and supplies.  Issue a disclaimer for any owner-supplied items.  Do not guarantee performance of green materials.  Charge extra if the product requires special installation methods.  Let the homeowner know that improper installation can invalidate the warranty.
  4. Write in the contract that you control the means and methods of the work.  Make it clear that the homeowner can only enter the construction site if he/she is escorted by one of the workers.  Have the owner commit in advance to the fact that you are the expert and must make sure that work will be up to code and pass inspection.
  5.  Have a clause in your contract that allows you to terminate if the homeowner refuses to make decisions in a timely fashion, causes unreasonable delay or refuses to cooperate with you.

Renovating or building a home should be a positive experience for both parties, but as all builders know, there are aspects of it that are stressful.  Don’t let your client add to your stress level by allowing them to invade your territory.

Sunday, June 09, 2013

Safety Checklist for Homeowners

In Massachusetts, homeowners are not held responsible for complying with safety regulations in construction.  They can sandblast paint that may contain lead, walk on their roofs without protection and operate in blissful ignorance of the laws regarding safety.  If homeowners hire contractors who do not follow safety rules, they are not responsible for that either.  The risk of noncompliance falls on the contractor.  If a homeowner creates an unsafe condition, of course he/she may be liable if someone gets hurt, but the homeowner does not have to police the contractor.  In fact, since many safety regulations make the cost of doing a job more expensive, there is an incentive for homeowners to hire contractors who do not follow the rules!  Today my friend and colleague, Mark Paskell posted a story about a roofer in Connecticut who died after falling off a roof[Roofer%20killed%20in%20fal].  You do not want to have that occur during your job.

Here is a checklist for homeowners to use when hiring a contractor:
  1. Make sure your contractor has worker's compensation insurance to protect his employees, and call the insurance company to ensure that it is still in effect.
  2. If the contractor is a sole practitioner, make sure he has health and/or disability insurance.  Sole practitioners do not have to have worker's compensation insurance in Massachusetts.  Check with your home insurance to see if they will protect you if someone gets hurt on the job.
  3. If the contractor is handling any kind of hazardous waste, make sure the he is complying with the proper procedure for removal and disposal of the materials (this protects both of you).
  4. If you hire a roofer, make sure that your roofer is using proper fall protection.
  5. If your house is pre-1978 and has not been tested for lead, familiarize yourself with the Renovation, Repair and Painting Rule (RRP) and confirm that your contractor will be following the lead-safe procedures
  6. Cooperate with your contractor by staying out of the construction site without asking whether it is safe to enter.
  7. Keep pets and children away from the work.
  8. Ask workers to leave the premises broom-clean at the end of the day; no one wants to step on or drive over nails.
  9. Follow safety procedures yourself, even though they are not required.
  10. Do not hire contractors who do not comply with the law!
As a homeowner, you have a responsibility to see to it that safety rules are follow when doing work on your home.  Even if the law does not require it, you should try to make the work safe for your family, the workers and your neighbors.

Sunday, August 05, 2012

Legal Tools for the Contractor's Toolbox

I was just thinking about two recent clients who were owed money by owners.  One had a contract that was not in compliance with the Massachusetts Home Improvement Contractor Statute and had waited a long time to pursue his money.  The other had a contract that fully protected him and contacted me once communication had broken down with the customer.  In the first case, my client ended up writing the homeowner a check because he couldn't face the risk of the multiple damages, attorney's fees, interest and costs that are available to the homeowner under the Consumer Protection Statute (c. 93A).  In the case of the second, I had no qualms about filing a mechanic's lien and pursuing payment aggressively because my client was in full compliance with state law.

Just as no respectable contractor would work with poor quality tools, contractors and construction companies should make sure that they are working with high-quality legal "tools" that will protect them in the event of a dispute or investigation by regulating authorities.

So, here is a list of the legal tools that should be in your toolbox:

  1. Make sure you have all required registrations for your field.  That includes staying up-to-date on developments in the construction arena.  Are you familiar with the special licensing required for roofers, windows and siding, demolition, etc.  Do you know about the lead law for residential renovation work?  Are you aware of the new continuing education requirement for contractors?
  2. Invest in a good contract.  The Massachusetts Home Improvement Contractor Statute (142A) has numerous requirements for contracts for home renovation work.  However, that contract does not necessarily have clauses that protect you.  For example, if you don't have a provision that allows you to recover your attorney's fees if you have to pursue payment from a client, you can't collect.  Contracts for new construction are different and should not be the same as your renovation contract.  All contractors should have contracts with their subcontractors.  I have written on this extensively in other posts.
  3. Use mechanic's liens.  Mechanic's liens are a great tool for getting paid.  However, the deadlines and procedures for filing them are very strict, and if you don't do it correctly and you miss the deadline, it is usually impossible to fix.  
  4. Demand letters.  When clients call, they often ask about filing suit when a dispute occurs.  However, filing suit should really be the last resort when there is a dispute.  A well-written demand letter can frequently resolve a dispute, and is much less expensive and stressful then a full-blown  lawsuit.
  5. Your lawyer.  Clients should call me before an issue arises.  I draft contracts on a flat-fee basis and tell clients to call me (for no additional charge) when they want to delete clauses or add language for a particular job.  I want to become familiar with their businesses and act as a trusted advisor. Preventing problems before they occur is much less expensive and stressful and enables you to focus on your business.  If a dispute does happen, we will discuss the best way to resolve it.  We will consider mediation and arbitration as well as the possibility of filing a lawsuit with your goals in mind.
A true craftsman does not work at a job without the best possible tools.  Make sure that you protect your business with the proper legal tools as well.

Labels: , ,

Thursday, July 12, 2012

The Massachusetts Prompt Pay Statute and Back Charges

I recently had the occasion to file my first lawsuit under the (relatively) new Prompt Pay Statute in Massachusetts.  The Prompt Pay Statute applies to construction projects of three million dollars or more.  There is a clause in the law that covers change orders.  It states that in order for a change order to be rejected, the owner or higher level contractor must state the contractual or factual basis for the rejection, and must certify that it is made in good faith.  The rejection also has to be made within a certain amount of time after submission of the change order depending on the level of the contractor (30 days for the owner plus 7 days for each level of subcontractor on down).  As part of this lawsuit, I alleged that back charges were issued late in violation of the contract, but I also stated that back charges are simply change orders after the fact, and for that reason,  the owner should have to state the contractual or factual basis for the back charges and certify that they are made in good faith.

What do you think?

Tuesday, May 08, 2012

Mechanic's Liens Basics in Massachusetts

Although I have written about mechanic's liens in the past, the power of a lien cannot be underestimated and bears repeating.  The right to file a lien is a huge advantage for contractors and construction companies, and is a unique tool that helps contractors get paid.  As long as the construction company has a written contract with the owner, it can file a lien on a property within ninety days of the date the it last worked at the project.  If the contractor is a subcontractor, the time for filing is extended to within ninety days of the last date that someone working by and through the general contractor worked at the project.  These deadlines are strict, and if they are missed, then the company can no longer file a valid mechanic's lien.

A lien consists of two documents; a Notice of Contract and a Statement of Account.  The Notice of Contract may be filed at the Registry of Deeds at the start of a project to put the public on notice that the company is working at the property. The Statement of Account provides the details of the contract price, the amount paid, and the amount still owed.  The lien is a public record that states money is still owed for work on the property.  These two documents constitute the mechanic's lien.

What does a lien do?  A lien causes a blemish on the title.  What this means is if the owner has a construction loan, or is trying to refinance or sell the property, the bank will not disburse funds until the lien is removed.  Even if a property owner is not trying to currently sell or refinance, most owners hate having a lien on their property.  They are usually extremely motivated to have the lien removed.

There are only three ways to have a lien dissolved.  One is to settle with the general or subcontractor and have them file a Notice of Dissolution of Lien.  The second is to go to court to have the lien removed because the construction company did not follow the proper procedure for "perfecting" or finalizing the lien.  If the lien is filed too late, the company fails to file suit within ninety days of recording the lien, or if the lien fails in some other way, the owner can file suit to have the lien dissolved.  Finally, the owner can purchase a bond to "bond off" the lien, but this is usually a costly remedy.

If a construction company misses the window for filing a lien, it can still move for a real estate attachment, but this requires filing an action with the court, and it must show a "likelihood of success on the merits."  A mechanic's lien can be filed by a contractor as of right; a party can only file a real estate attachment if a court grants them the right to do so.  That is why a mechanic's lien is a tool that cannot be ignored.

Liens can be an incredibly powerful tool when a contractor or construction company is owed money.  However, unlike most legal actions, the contractor may lose his opportunity to record a valid lien if he does not follow the proper procedures.