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 | 33 Comments

33 Responses to “What to do When Your Contractor Doesn’t Pay Subcontractors and Suppliers”

  1. Michael says:

    I have a lien waiver from the contractor saying he cannot place a lien on my home, he has not paid the subcontractor that installed my gutters, does that document help me in any way or will I have to pay the gutter subcontractor. I am in Oklahoma so things may be different here.

  2. joelrosen says:

    Unfortunately mechanic’s lien law is state specific. In Massachusetts, a subcontractor can only collect against the owner if he files a mechanic’s lien, and only to the extent that money is owed to the general contractor. If you could prove that you paid your contractor in full, you would not be forced to pay his subcontractor, but you would have to bring an action in court to have the subcontractor lien dissolved. Oklahoma may be very different.

    -Andrea Goldman

  3. chris says:

    I sub for a contractor who has not paid me in a month. The nursing home we are workin on is has been finished for awhile he is closing the doors on his company how do I get paid?

  4. chris says:

    How would I go about putting a lien against him or his company? If that’s possible

  5. joelrosen says:

    You may have a claim under the Prompt Pay Act, if the job was for more than $3 million. You may also be able to file a mechanic’s lien. Although you are a subcontractor, you may also be characterized as an employee under the Massachusetts Wage Act. If this is in Massachusetts, you can call Andrea Goldman at our office at 978-474-0100 to get a more detailed answer.

  6. Nicole says:

    My fiance was subcontractor and the contractor refuses to psy him. Contractor from Wisconsin. We are from Iowa and house work was done on is Illinois. I want the contractor to pay me not the homeowner who has already paid the contractor. What do we do??

  7. joelrosen says:

    Nicole, we are not licensed to practice in Illinois, but filing a mechanic’s lien is frequently an excellent tool to put pressure on a general contractor to pay; especially if the homeowner has already paid the contractor. I can help you find a construction lawyer in Illinois if you want to pursue legal remedies.

    -Andrea Goldman

  8. Lee says:

    We (the homeowners) contracted with a flooring company to install floors. The work has been completed and the contractor was paid in full (two credit card payments and one check). We just received a notice of lien from the supplier of the hardwood used for the flooring. Apparently he was never paid. Calls to the contractor are going unanswered to include the business address and the personal cell phone of the flooring company owner. I fear they are going, or have gone, “out of business.”

    What is the next step? Can I attempt to chargeback enough of the past payments to fulfill the subcontractor? Cancel the check? Go to court?

    Any advice appreciated. (We are in Utah)

  9. joelrosen says:

    As a practical matter, it is probably too late to charge back payments or cancel the check. In Massachusetts, if you can show that you paid the contractor in full, it may be a defense to a mechanic’s lien. I would ask a Utah attorney. Try Avvo.

  10. Robin says:

    I am a subcontractor that does work for the Washington Children’s Administration. My contractor gets paid from the state. My contractor has been paid and still has not paid many of us some from 5 months ago. We have received some money but not all of it. Is there anything we can do? Isn’t the state liable for who they contract with?

  11. joelrosen says:

    We aren’t licensed in Washington, so I can’t tell you much about the state’s law. You do have the right to file a wage complaint. Here is a link: http://www.lni.wa.gov/WorkplaceRights/Wages/PayReq/Wages/default.asp. You should see an employment attorney in Washington.

  12. Larry Harrison says:

    I work for a cleaning contractor, that has told us that we wetter no longer employed but sub contractor.Also she has been withholding pay weekly bc she says the she didn’t get a check from the company she contacted to clean out the check wss not big enough to pay all her employees.She has went for weeks without paying us and when she did it wasn’t the right amount.She would have to make it up on other checks.But lately she started bouncing pay roll checks.So now she started paying us in cash but only$200 out of $800 owed.What can we do to make her pay us every week the money owed.We know she can’t pay bc of her misusing the payroll for her own pleasure.

  13. joelrosen says:

    This is outrageous. If this occurred in Massachusetts, the contractor can be liable for treble damages and attorneys’ fees under the Wage Act. If you would like to speak with us about this, give us a call.

  14. Natalya says:

    My boyfriend is a painting subcontractor in Lincoln, NE. He did the job he was hired for about 20 days ago and the contractor has not paid him yet. The owner of the house he repainted is not responding to my friend’s phone calls. What should we do?

  15. joelrosen says:

    We don’t practice in NE, so we have no opinion. However, in MA or NH, he may be entitled to file a mechanic’s lien. He can read the statute and try to do it himself, but the process is rather complicated, so he would be better off with a lawyer’s help.

  16. Randi Bennett says:

    My husband is a subcontractor and installed windows in a home for a general contractor here in Ohio in November, 2016. Normally my husband is paid on job completion. After job was completed the general contractor kept stalling to pay. Took a 2 week vacation stating he wasn’t at the office to send payment, then when he returned he asked my husband for his workmen’s comp docs and liability insurance docs. As a sole proprietor in Ohio he is WC and Liability insurance are not mandatory. He never started these items would be needed in order for my husband to be paid, but now is saying he won’t pay him because he doesn’t carry. We found out he has over 60 court cases over many years from criminal to civil cases involving not paying people. He told my husband that my husband has no lien rights and he would sue him for filing a false lien…don’t know if he is using scare tactics or what, but it seems like a lost cause and that we are just out $825.00. Should we still pursue possible lien filing or just let this go…which is very hard to do as my husband is a very small business and this has really hurt our family.

  17. Carl Fincher says:

    I recently did two jobs for XXX Company (cell /tower contractor) in which myself and 3 other people have not gotten paid for. There is no physical contract only a verbal that we would be paid at the end of the job. Any direction you can give me will be much appreciated. Thank you

  18. joelrosen says:

    It’s obvious that when you do work with the expectation of payment, you are entitled to be paid. Your remedy will depend on whether you are considered an employee or an independent contractor and what the particular state’s laws provide. In Massachusetts, for example, you would probably considered an employee, and XXX Company would be liable for three times your unpaid wages, plus attorneys’ fees. If this is a Massachusetts or New Hampshire case, give us a call.

  19. joelrosen says:

    Unless the subcontract made WC and liability insurance a condition precedent to payment, your husband has a right to be paid. He should file a mechanic’s lien. I don’t practice in Ohio, but I would see a construction attorney in your state. By the way, your husband is taking a big risk by not carrying WC insurance, whether or not the contract requires it.

  20. James Carter says:

    The general contractor wrote the estimate four 1100. I went and completed a ceramic tile shower and the home owner told me they was bet happy about the way I worked and the quality of work. I called the general contractor to let him know the work was completed and now he refuses to pay me

  21. David Stupka says:

    We hired a roofing contractor in July. His Foreman assured us they would be done in 4 weeks. We have a rather large steep roof on an old Victorian farmhouse. We had to do backflips to find the money for a roof. The contract we honored and paid in full not all at once. The young man who is the contractor apparently fell into a bad situation. And did not pay the supplier for the material. Now the supplier has put a lien on our home. We are unable now to refinance the home to pay back the money we borrowed for the Ruth. I honestly do not know what to do . Is there someone you can recommend for us to see legally in Moultrie Georgia ?

  22. Todd Williams says:

    I have paid my contractor in full for interior painting. He is not paying the painter and the painter is threatening to put a lien on my home. What are my options. I live in SOuthern California

    Thank you

  23. JOe says:

    I have a contractor who ran out of money midway through work hired another company without letting me know never paid me

    I lost signed contract but have email copies even with him agreeing to terms even though they are not signed can I sue him

    Come to find out He has done this to many other sub contractors

  24. joelrosen says:

    If there is a contractor licensing board in your state, you should report the contractor. There may be an arbitration program or a guaranty fund, as there are in MA, and you may be able to collect from the fund even if the contractor is insolvent. You can do this without a lawyer.

  25. joelrosen says:

    You can sue the contractor in small claims court. You can also report the contractor to your state licensing board. If they have an arbitration program, you can take advantage of that.

  26. joelrosen says:

    I would certainly report the contractor to the licensing board in your state. Chances are you are not going to get your money back. Talk to your lender. The materials are usually not a significant part of the job. Perhaps you can refinance subject to repayment of the supplier.

  27. joelrosen says:

    That is a great price! I would file a mechanic’s lien.

  28. Stacy says:

    Hi, I live in a townhome community that was flooded in Harvey. The contractor over charged over 1 million and there is possible fraud going on with the prior board. The subcontractor has placed Liens on all units. There r Lien releases for some buildings. The sub is now suing individual homeowners. Can the sub do that? This is a condominium association. There is not enough money to finish units it is insult to injury with many of the homeowners being elderly. Current board is being quiet and no one knows what is going on. Any advice?
    Thank you

  29. bankimchandra d desai says:

    Dear Sir,

    Sorry to contact you, I got your name from the internet research and from one of the articles you have published, hoping to get some guidance from you.

    I am new in construction industry.

    I started by building my own house.

    I hired a construction manager to build our own house and to enter in the construction industry.

    I found out one vendor myself for dive way pavers and backyard pavers. We signed a contract with him

    to finish above project of drive way and back yard for X amount of money including labor and materials charges.

    He completed job. He made me buy $ 6363.88 worth of material which I bought on my credit card
    and provided him.

    I mad him a full payment and provided material worth $ 6363.88 which he was supposed to purchase himself.

    Out of nowhere, I got a certified mail from a supplier from whom this vendor of mine bought some
    materials stating that they are bringing a lien against my property in the sum of $ 16621. 91 and
    included copies of 14 invoices which I have no knowledge of.

    So , I already paid my vendor his labor and material cost for the contract ,I have to pay again
    to the supplier of his the material cost even though I paid my vendor not only the material cost
    but also $ 6363.88 material I bought for him on credit. I am paying the material cost twice.

    Is there any justice in the USA?

    Can you show me how should I handle this situation.

    I feel like quitting the construction field I have decided to go into.

  30. Jane D says:

    Hi!
    We paid our contractor in full for an outdoor landscaping job. Today the subcontractor he had do the actual work/labor, sent a text this morning saying that he has still not been paid the full amount for the work. At first I was wondering why is he telling us this, as we have nothing to do with the contractor, but after reading all of these comments it has me worried that he’s going to try and throw this on us… Even though we already paid in full to the contractor that he worked through and have a receipt that states “Invoice Paid in Full”. How would you suggest to go about this? This was our first time ever hiring a contractor so we’re not familiar with any of this. We do have the invoice that states everything that was done, but nothing about a lien waiver as we didn’t even know that was a possible thing that could happen.

  31. joelrosen says:

    Every state is different, and we do not give legal advice on our website. Generally, however, there is a risk that the subcontractor could file a mechanic’s lien. The lien is good up to the amount you owe the general contractor at the time the lien is filed. If you have paid the GC in full, you can file a complaint to discharge the lien. How you do this, and whether it is worth doing, will require a conversation with a lawyer.

  32. joelrosen says:

    Your question is similar enough to the one from Jane D., that I am going to repeat my answer here. Every state is different, and we do not give legal advice on our website. Generally, however, there is a risk that the supplier could file a mechanic’s lien. The lien is good up to the amount you owe the general contractor at the time the lien is filed. If you have paid the GC in full, you can file a complaint to discharge the lien. How you do this, and whether it is worth doing, will require a conversation with a lawyer.

  33. joelrosen says:

    Your fact pattern is complicated and incomplete. I cannot possibly answer this on this on the website. Generally, however, a lien waiver would bar a mechanic’s lien to the extent of the work that the waiver covers. There may be an issue regarding who received the lien waiver and who can claim to be protected by it. As you note, there are issues regarding fraud and overcharging, and there are potential complications if there were insurance or governmental payments involved. It would probably be most efficient if your condo board retained counsel on the individual homeowners’ behalf.

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