Anyone involved in the construction business knows that a successful job requires several moving parts. A client may hire a contractor, but that contractor hires subcontractors, who have their own vendors to deal with. Ironically, construction payment is more of a house of cards–disturb one card, and the entire operation suffers. When contractors or subcontractors do not get paid on time and in full, they don’t suffer alone—everyone involved in the project feels the sting. What are the most common reasons contractors don’t get paid, and how can you break the cycle?
1. Contract Issues
Before getting started on your job—even if you’re working with a friend or associate with a stellar industry reputation—review your contract with an attorney. Many folks in construction still work off handshakes and promises, but these agreements (for obvious reasons) can be challenging to enforce. Do yourself a favor, and get it in writing. Identify the exact scope of the work, have a contract attorney review it, and have everyone sign it ahead of time. This will save you a lot of trouble later.
2. Failing to File A Lien
Another common mistake contractors (and subcontractors) make is not filing a lien when they initially fail to get paid. There are strict statutes and filing deadlines that apply to construction liens: miss one, and you lose your leverage. We’ve all heard the excuses: The check’s in the mail. You know I’m good for it. Your payment’s coming. Before you know it, you’ve let their excuses take you right past the filing deadline. On the other hand, if you file a construction lien, the encumbrance is on them. That’s what makes filing one so powerful – and so important.
3. Failing to Document
Construction hiccups happen all the time. Contractors too often expand the scope of a project without filing a formal change order or following up with an updated quote. Create a paper trail, and err on the side of over-documenting. If a dispute over the job (or re: payment) lands you in court, this paperwork should be able to help your case immensely.
4. Breakdown in the Payment Chain
If the subcontractor or vendor is not getting paid, it might be because the money ran out somewhere up the line. It may take extra time, but do not give up fighting for fair compensation.
5. Disputes About Percentage
Construction projects usually work on progress payments, depending on what you do on a job. For example, you might get a payment after 25% of the work is done, then 50%, then 75%, and a final payment upon completion. People often get paid in a timely fashion in the beginning, but as money dries up, everyone starts quibbling about percentage. Again, these are issues that may be resolved with explicit contracts.
6. Disputes About Performance
In construction projects, many customers think they can exercise leverage over their contractors by saying they were unhappy with the work. There are certain instances where the law is on their side: for example, if there’s a clear violation of the homeowner’s warranty. You may eventually be able to collect payment for services rendered, but the amount of litigation and expense involved will depend on (1) the quality of your contracts and (2) whether or not you filed a lien.
7. Different Payment Terms Create Delays in Payment
Lastly, you’re bound to run into a few roadblocks when you’re working with multiple companies that have different payment schedules and terms. Your best bet is to make sure everyone is clear on payment terms ahead of time. You may not be able to completely avoid delays in payment, but you can minimize them with some planning.
If you’re struggling to get payment from your customers or contractors, we can help–call us for a confidential and strategic review of your options.