What Steps Can A Contractor Take To Increase Their Chances Of Getting Paid For Its Work?
The standard procedure for getting paid on a construction project is simply to perform quality work, meet deadlines, and then submit an invoice for Application for Payment. The vast majority of construction work is performed this way, and the required payments are made. However, as a construction lawyer, I look for ways to protect my clients in those cases where they did quality work, they met all deadlines, but for some reason, there is still a delay in the payment, or the payment is being withheld entirely. In such a case, the business that has not been paid (whether that is a general contractor who has not been paid by the owner, or a subcontractor who has not been paid by the general contractor, or even a materials or equipment supplier who has not been paid by a subcontractor) can do certain things at the beginning of the process to give them the best chance of getting paid later on. The first thing a construction business should do is have an experienced construction lawyer review their contract before it is signed and before any work is ever performed. Construction contracts can be horribly one-sided and burdensome on the party that didn’t write the contract. Therefore, it makes sense to have a construction lawyer identify those one-sided terms and hopefully negotiate something more favorable. Even if the other side isn’t willing to change any of the contract terms, the contractor or subcontractor will at least know which terms are likely to be problematic and can be extra diligent watching for problems in those areas.
In addition, the contractor, subcontractor or supplier will want to send a document called a “Preliminary 20-Day Lien Notice” within 20 days of when it first provided any work or materials to the Project. This document is a called a “20-Day” lien notice because under Arizona law, the one sending the 20 Day Lien Notice is preserving its right to put a lien on the property for any work that it performed starting on the date that is twenty days before the 20-Day Lien Notice was sent. Therefore, if the contractor waits more than 20 days to send the notice, then he will have lost the right to place a lien on the property for whatever work he performed at the beginning of the project. For example, if a contractor sends it Preliminary 20-Day Lien Notice 30 days after starting its work on the project, then will not have the ability to place a lien for any work that was done during those first 10 days of work, because that work was done outside of the 20-day window.
Although I have been referring to sending the Preliminary Twenty-Day Lien Notice to protect a contractor’s or supplier’s right to place a lien on the project, this preliminary notice actually protects much more than just lien rights. If a contractor or supplier does not send that Preliminary 20-day Lien Notice, it will also lose the right to: (1) make a claim on any sort of payment bond that is in place on the project; or (2) pursue a Stop Notice to place a hold on funds from a construction loan for the project. In other words, with a proper and timely Preliminary 20-Day Lien Notice, a contractor or supplier has the right to pursue any and all payment remedies, including liens, bonds and stop notices. Without a proper and timely preliminary notice, all those rights are lost.
How Should A Contractor Handle A Situation In Which A Project Costs More To Complete Than The Amount That Was Included In The Original Contract?
If a project ends up costing more to complete than the amount that was included in the original contract, then a couple of different things can happen. From the contractor’s perspective, the worst case scenario would be to simply lose money on the project. For example, if a contractor committed to complete a project for $1 million, and later realized that it underestimated the cost and should have actually bid $1.2 Million, then it would most likely have to eat the loss on that project.
However, that is not always the case. If a contractor finds itself in a situation like this, it would be a good idea to consult with a construction attorney to determine if there is some other option than simply having to absorb a $200,000 loss. Although it’s not common, there are certain circumstances in which a contractor could get out of this type of situation.
For example, if the owner of a project gets five bids for $2 million and only one for $1 million, then that should indicate that there may be something wrong with the bid for $1 million. Under these circumstances, it would be in the owner’s best interest and very likely their legal obligation to go to the contractor before accepting their bid, saying something like “Your bid is much lower than the bids that we are receiving from other contractors, and we think it’s likely you have missed something. Can you go back and look at this and make sure that your number is accurate?” Often, upon rechecking the numbers, the underbidding contractor will find the error and correct its bid. Maybe it won’t end up getting the contract because it is no longer the lowest bidder, but it also won’t be tied down to a project guaranteed to lose money from the start.
When a bidding error like this occurs, if a contractor financially to absorb the loss, then it would certainly increase its reputation within the community to do so. Absorbing some short-term loss may actually work to the contractor’s long-term benefit as it develops the reputation for honoring its obligations even when it is difficult to do so.
Another situation that often arises which would make it impossible for a contractor to complete a project for the previously agreed upon price is if conditions at the project site are materially different from what the contractor expected based on the documents and information received from the project owner. For example, if the engineering and soils reports provided by the owner indicate standard soils conditions for the excavation and ground work, but the contractor then encounters rock that will require more time and additional equipment to dig through, then it would be perfectly appropriate for the contractor to go to the owner and say, “This is different than what we originally bid for. We can still do this, but it is going to take us longer than what we agreed to and it is going to cost us more money than what we agreed to.” At that point, the contractor should receive a change order, which is essentially just an amendment to the contract that will allow them to take more time and be paid more money for the job.