October 2010
by Walker M. Duke
A major trend over the past couple years has been a dramatic increase in payment disputes. They range from disagreements about the scope of work in a contract to an upstream party closing its doors and leaving its subcontractors with no payment and little practical recourse.
I never like telling my clients that yes, they are owed a significant sum of money, but due to another party’s insolvency, they will probably never see a penny. To help avoid this conversation, here are three practical steps to enhance the likelihood of prompt payments.
Practical Step #1: Know Who You’re Contracting With
The construction industry has its share of fly-by-night builders. More commonly, however, contractors may be generally familiar with a company but not well versed in its specific business practices. Perhaps most importantly, the financial stability of another company may be unknown.
When working with a new company, it is wise to perform some due diligence. Due diligence may not sound like the first step you would take in the bidding process (particularly in a down market), but it should be part of your company’s protocol before signing a final contract. Consider the care you take before simply hiring a new employee. Your process for evaluating other parties to contracts worth thousands or millions of dollars should be no less strenuous.
Practical Step #2: Payment Bonds, Payment Bonds, Payment Bonds!!!
Surety bonds protect your investments. Even the best developers and construction companies sometimes are unable (or unwilling) to pay on their contracts. In that scenario, it is extremely important to have a financially sound bonding company in place that can step in and pay.
The bigger the project, the more important a payment bond is. As the contract price goes up, so does the impact of nonpayment. However, I have seen many smaller projects where no payment bonds are used.
Payment bonds do add expense to a project and cut into everyone’s bottom line. And they are something you hope to never use. But before writing off this “payment insurance,” ask yourself how your company could withstand the impact of nonpayment. Not slow payments, not partial payments. Can your company absorb a complete non-payment? If this scenario spells disaster, it is critical to have a little insurance in the form of a payment bond rather than rolling the dice on another party’s ability (and willingness) to pay their obligations.
Practical Step #3: File Your Liens…ON TIME
Mechanics liens are one of the easiest ways to ensure payment on a construction project, yet they are one of the most commonly botched practices.
Liens are, generally, fairly easy to perfect. However, they are also technical and have rigid deadlines. Failure to comply with these deadlines and other technical requirements will render your lien invalid (and could possibly subject to you liability).
Specific deadlines vary by jurisdiction, but typically, a contractor must provide notice (amounts owed and dates the work was performed) to the original contractor and/or property owner within a couple months of the work or materials being furnished. A lien affidavit must also be filed in the county where the property is located. In some instances, notice must even be given to the construction lender.
Contractors should have protocols in place to ensure compliance with their jurisdiction’s lien prerequisites. Send regular notices every month as work is performed. Most importantly, do not keep waiting month after month for payment. Almost without exception, blown deadlines will render any lien unenforceable. Remember, advance planning and good billing practices are the key.
Walker M. Duke is an attorney and founder of Duke Law Office, P.C., in Dallas, Texas, where he specializes in construction law and business litigation. He also writes a construction law blog that can be found at www.texasconstructionlaw.blogspot.com. Walker can be reached at (214) 523-9033 or wduke@dukeseth.com.
