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

September 15th, 2013

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 in Massachusetts 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 After filing these documents, the sub or supplier must file suit within 90 days, or the lien is no longer valid.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.

-Andrea Goldman

http://www.goldmanlg.com/

posted by: joelrosen in BUSINESS, BUSINESS ADVICE & LITIGATION, CONSTRUCTION CONTRACTS & DISPUTES | 2 Comments

What to do When Your Contractor Doesn’t Pay Subcontractors and Suppliers

August 15th, 2013

Recently I was contacted by some homeowners when their contractor told them that he had run into financial troubles and would not be completing their renovation work. They quickly discovered that he had not paid numerous subcontractors and suppliers and left them holding the ball. Over the years, I have seen this scenario many times. Contractors who are not adept at running their businesses “rob Peter to pay Paul.” At times, it is simply mismanagement of their finances, but sometimes it is intentional and criminal.

How can a homeowner avoid getting caught in this kind of situation? At its worst, I had a client who discovered that fourteen of the sixteen subs were never paid. The homeowner pays his general contractor in good faith and then faces the prospect of having to pay twice for the same work and materials. There are some ways that a homeowner can protect himself.

1. Make sure your contractor is properly registered and insured.
2. Ask references if the contractor was reliable, came to the work site regularly and followed the payment schedule.
3. Be wary of contractors whose bids are substantially lower. They may request more change orders in order to jack up the contract price to what it “should” cost.
4. Start with a good contract and link payments to the completion of milestones. Have a clause in your contract that allows you to cancel if your contractor fails to pay subs and suppliers.
5. Make the payment schedule detailed and spread evenly throughout the project (for example, 10% upon pouring the foundation, 10% upon completion of the framing, 10% upon completion of the rough inspection).
6. Avoid an overly large deposit. In Massachusetts, the deposit cannot exceed 33 1/3% or the cost of special materials; whichever is greater.
7. Require lien waivers in the contract as subcontractors complete their work and are paid.
8. Be wary of contractors who ask for payments in advance of the payment schedule.
9. Make sure that materials have actually been ordered by your contractor.
10. Make sure the payments do not get ahead of the work.
11. Periodically ask subs and suppliers if they are being paid as required.
12. If you are not able to be onsite to check the progress of the job, hire an owner’s construction manager to monitor the work for you.

If you sense a red flag, do not ignore it. Confront your contractor and find out why there is a subcontractor not being paid. If you are not satisfied that the job is being run properly, reserve the right to terminate your contractor and hire someone else to finish the job.

One of the homeowners who was abandoned by his contractor found himself in an excellent position. He had enough money left to finish the job with another contractor and did not suffer any damages. Even the best home improvement contractors have found themselves in a cash flow bind. The honorable ones will be forthright about it and address the issue. Be wary of the contractors who may abandon the job.

My next post: What to do when the subs and suppliers ask you for payment.

Andrea Goldman

http://www.goldmanlg.com

posted by: joelrosen in BUSINESS ADVICE & LITIGATION, CONSTRUCTION CONTRACTS & DISPUTES | 15 Comments

How to Handle Micro-Managing Homeowners

August 9th, 2013

Controlling business puppet conceptI 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.

-Andrea Goldman

Massachusetts Construction Lawyer

posted by: joelrosen in BUSINESS ADVICE & LITIGATION, CONSTRUCTION CONTRACTS & DISPUTES | 2 Comments

Safety Checklist for Homeowners

June 9th, 2013

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 http://www.thecontractorcoachingpartnership.com/Blog-Contractor-Coaching–Construction-Business-Coach-EPA-RRP-Lead-Rule/bid/65475/roofer-killed-in-fall-from-roof-in-westport-ct-osha-investigates?source=Blog_Email_[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 6. Painting Rule (RRP) and confirm that your contractor will be following the lead-safe procedures

7. Cooperate with your contractor by staying out of the construction site without asking whether it is safe to enter.
8. Keep pets and children away from the work.

9. Ask workers to leave the premises broom-clean at the end of the day; no one wants to step on or drive over nails.
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.

Andrea Goldman

posted by: joelrosen in CONSTRUCTION CONTRACTS & DISPUTES, Uncategorized | No Comments

Legal Tools for the Contractor’s Toolbox

August 8th, 2012

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:

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?
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.
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.
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.
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.

Andrea Goldman

posted by: joelrosen in BUSINESS ADVICE & LITIGATION, CONSTRUCTION CONTRACTS & DISPUTES | No Comments

Mechanic’s Liens Basics

May 8th, 2012

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.

Andrea Goldman

posted by: joelrosen in CONSTRUCTION CONTRACTS & DISPUTES | No Comments

When is your construction employee entitled to the Prevailing Wage?

March 15th, 2012

Not everyone who works on a public construction project in Massachusetts has to be in a union.  However, to prevent ordinary workers from undercutting the unions, non-union shops have to pay their employees approximately what union workers make.   Prior to the start of any public works project, a list of the jobs which are to be employed on the project is submitted to the Director of the Department of Labor Standards.  The Director then determines a rate of wages for certain classifications of jobs.  The awarding authority is then furnished with a schedule of such wages and updates these wages on a yearly basis until the project is complete.  This higher hourly rate is called the prevailing wage and is mandated by the Massachusetts Prevailing Wage Laws, G.L. c. 149 §27.   

If you are in the construction business, you want to pay your workers what the law requires.  A basic understanding how workers should be classified under a Director’s schedule of wages is therefore extremely important.   Failure to correctly classify workers can expose employers to significant fines and expensive lawsuits.  A worker who is not paid the appropriate prevailing wage has the statutory right to bring a lawsuit in his or her own name after initially filing a complaint with the Attorney General.  If successful, the employee is entitled to mandatory treble damages for any lost wages, even if it is the employer’s first offense and/or even if the employer’s violation was unintentional. 

For the most part workers will fall neatly under one of the enumerated categories of jobs on the director’s schedule of wages; however, some workers, despite their job title, perform duties which make it difficult to determine whether or not they should be paid the higher prevailing wage.  For example, workers who deliver materials which are not used in road construction do not generally fall under one of the Director’s classifications.  However, when those same workers are in some way “engaged in construction activity” in connection with a public works project, then regardless of their job title, they may be entitled to the prevailing wage.

While there is no bright line rule for an employer to know whether an employee is “engaged in construction activity,” courts have interpreted this phrase as requiring that there be a “significant nexus between the employee’s work and the site of the construction project.”   In other words, regardless of what your employee’s job title may be, an employer should always ask: What exactly is my worker required do at the public works site?   If your employee is required to perform any type of labor on site or in connection with the construction project, that employee should most likely be paid the prevailing wage.   The Department of Labor Standards publishes annual topical outlines which are useful to employers seeking guidance on specific worker classifications. The most recent can be found at http://www.mass.gov/lwd/docs/dos/prevaling-wage/interim-topical-outline.pdf 

Peter Fisher

posted by: joelrosen in BUSINESS, BUSINESS ADVICE & LITIGATION, CONSTRUCTION CONTRACTS & DISPUTES, EMPLOYMENT & DISCRIMATION | 17 Comments