It’s every subcontractor’s worst nightmare: The general contractor who hired you does not or will not pay you. So what can you do?
There are ways to obtain payment and methods of avoiding the issue of non-payment altogether. It just takes a little advance work on your part and some knowledge of civil law.
Why Subcontractors Don’t Get Paid
What makes a general contractor neglect to pay the subs?
- The owner or contractor is bankrupt.
- The contractor is no good at business and tried to rob Peter to pay Paul.
- The contractor is cheating you; payment is intentionally withheld.
Each state has different laws and statutes governing the actions a subcontractor can take against a general contractor. Consult an attorney knowledgeable about the laws governing the state where the project took place so that you can determine which tools are available to you.
Here is a general overview of the types of legal tools available in most states.
Create a Rock-Solid Contract
Before you sign a contract with the GC, try to think of everything that needs to be in it. If anything is missing, add it. Add clauses stipulating how much you get paid and when. Once you’ve both signed on the dotted line, you can use that contract for leverage—or sue for breach of contract.
Recommendation: Add a clause guaranteeing payment regardless of whether the contractor gets paid.
Some contracts come with a contingency clause stipulating “pay-when-paid” or “pay-if-paid.” Neither of these is helpful for a subcontractor.
Avoid contingent payment clauses. Some contracts come with a contingency clause stipulating “pay-when-paid” or “pay-if-paid.” Neither of these is helpful for a subcontractor. Quite the opposite, actually; the clause is saying the general contractor is not required to pay you until and unless the owner pays the GC. You are better off with a contractual agreement that states you get paid no matter what.
Check for Payment Bonds
Sometimes owners ask the contractor to take out a payment bond with a surety company. The bond is insurance protecting both the owner and the subcontractors.
If the contractor defaults or otherwise doesn’t take care of your wages, you can file a claim with the surety company to get at least part of your money. The surety company then takes the contractor to court to recover the amount.
Most of the time, subs have up to a year after they last worked on a project to file a claim for payment.
Place a Mechanic’s Lien
Depending on state law and the type of contract, a subcontractor can place a mechanic’s lien on the property and get payment from the owner. If you are unable to get satisfaction, you can foreclose on the property and obtain payment from the sale. It doesn’t matter if the owner paid the general contractor in good faith; a mechanic’s lien will force him or her to pay twice. The owner can then sue the contractor.
Take note: In some states, the lien must be placed before the project’s completion.
Unlike a work stoppage for breach of contract, suspending work is a less aggressive tactic. Work remains suspended until payment is received. Each state differs on how or if work suspensions are allowed, and some contracts prevent subs from suspending work. Consult legal counsel to learn if a suspension is allowed in your state.
Report or Sue the General Contractor
Taking someone to court costs money. However, you may be able to get your attorney fees paid and possibly a penalty placed on the contractor if you sue for non-payment. States with “prompt pay” laws typically require subs to take the contractor to court to invoke the penalty, but it is one more lever you have to get your money.
An example of a “prompt pay law” is California’s Statute 7108.5. It requires contractors to pay their subs no later than 10 days after the receipt of each progress payment unless otherwise agreed in writing. If there is a good faith dispute, the contractor cannot withhold any more than 150 percent of the disputed amount.
Most states have laws protecting subcontractors. Sometimes, though, you will need to go to court to reap their benefits. The best offense is a good defense. Get payment terms in writing before you sign the contract.
Your Key to Staying in Compliance
Compliance issues can have costly repercussions for your construction company. Learn the laws you should be aware of by reading “Labor Law Compliance in Construction and Field Service Industries”