By Van M. White, Samuels Yoelin Kantor, LLP
8 Minute Read
While construction liens are a very effective collection device, they are not the only collection device in your toolbox and they don’t guarantee that you will receive payment. Don’t just depend on your lien rights to get paid. It is important you take other steps to make your claims for payment more certain and more secure. Many of the steps suggested below are “due diligence” type steps that should be taken before your company has obligated itself to provide labor, materials, equipment, or services to a construction project.
Steps to Make Your Claims for Payment More Certain and More Secure:
- Know who you are dealing with.
- Make sure the parties are properly licensed.
- Learn about the subject property.
- Include contract terms to make your claims for payment more certain and more secure.
- Avoid contract terms that diminish your rights and/or claims for payment.
- Document changes and important communications.
- Listen to Your Gut.
1. Know Who You’re Dealing With
In my experience, many contractors and suppliers don’t do enough research about the other party before they sign a contract or otherwise obligate themselves to provide labor, materials, equipment, or services to a construction project. It’s not uncommon for me to learn when collecting past due amounts for a client that they didn’t know much about the party with whom they were dealing and hadn’t done any research about them. They often didn’t check on the licenses and corporate registrations of the other party.
Spend some time before signing a contract or entering into an agreement (Use written contracts!!!) to learn about the other party with whom you are dealing. Search the Secretary of State website to confirm that the company and/or its assumed business name is actively registered. Find out the names of the owners, officers, and members of the company. Make sure that the person with whom you are dealing has authority to act on behalf of the company they’re purportedly representing. Watch out for people have opened (and closed) numerous entities or assumed business names.
2. Make Sure Parties are Properly Licensed
In conjunction with checking corporate and business names, if you are dealing with a construction contractor you should confirm that they are actively licensed as a contractor with the Oregon CCB or Washington L&I. In addition to learning more about the other party (and any prior licenses they may have held) by checking on their contractor’s license, the CCB and L&I websites also provide information about claims and lawsuits against contractors. Watch out for contractors with open claims and/or multiple claims. In addition, you could lose important rights if the contractor with whom you are dealing isn’t licensed at the time you enter into a contract with them or during the course of your performance. If they weren’t actively licensed as required by the CCB or L&I, you could lose the right to access their contractor’s license surety bond.
With respect to lien rights, if a subcontractor or supplier provides labor, materials, or equipment on a residential project in Oregon to a contractor that is not actively licensed with the CCB when they entered into the contract with them or when they first delivered labor, materials, or equipment, the subcontractor or supplier may not file a lien in the event of non-payment. Even if you usually work with the same contractors, you should check on their contractor’s license status before every new project with them. The CCB has a program for contractors called E-Watch whereby the CCB will send you an e-mail when the status of a contractor’s license changes. This is particularly helpful for general contractors. See the CCB website for further information about their E-Watch program.
3. Learn About the Subject Property:
While you may not feel that you need to know much about the subject property unless you haven’t been paid and have to file a lien, I recommend that you do some research with regard to the subject property prior to signing a contract or obligating your company for a construction project. Just like checking on businesses and contractors, a small of amount of time researching the property at the front end can help make your claims for payment more certain and more secure. It is also important to learn about the subject property and the property owner so you know the connection between the party with whom you’re contracting and the subject property.
If you are not paid and find it necessary to file a lien to secure payment, you may need to prove that the property owner was aware that you were providing labor, materials, equipment, or services to their property and that there is a connection between your company and the property owner. This especially true for distant material suppliers. As such, you should know your connection to the property owner before you start providing labor, materials, equipment, or services to the project. You should also know whether the project is residential or commercial. Otherwise, in general, it’s helpful to know who owns the property that is receiving the benefit of your labor materials, equipment, or services, especially if you aren’t being paid. If you’re not being paid, a call to the property owner, even if you don’t have a contract with them, often leads to prompt payment.
4. Have Contract Terms That Make Your Payment Claims More Certain
First and foremost, make sure you have written payment terms that meet your cash flow needs. The payment terms should clearly state how soon payment is due after receipt of your invoice. The payment terms should also specify that past due amounts are subject to a late/service charge, the interest rate on past due amounts, and when interest starts to accrue. Other contract provisions to protect your claims for payment include the ability to suspend or terminate your performance if you are not paid in a timely manner and the right to attorneys’ fees and costs for the collection of past due amounts.
5. Avoid Contract Terms That Diminish Your Rights or Claims for Payment:
The time to address unfavorable contract terms is before you sign the contract. While it is preferred that you use your company’s contract (which should include terms and conditions that protect your company), there are many situations where you will be required to sign the other party’s contract in order to get the project. If you are asked to sign the other party’s contract, it is important that you read it and understand it. I have represented many contractors and suppliers over the years who signed contracts without fully reading and/or understanding them, particularly subcontractors on commercial projects. That is a good way to put your company out of business. If you encounter contract terms that you believe are unfair, you should try to delete them from the contract or revise them so they are fair.
Contract terms to avoid and/or be wary of include: pay if paid and pay when paid clauses; waiver of lien rights; termination for convenience; quick turn-around time to address alleged issues with your work; damages for delays; and liquidated damages. Don’t be shy to try to delete or negotiate contract terms that you perceive to be unfair with the other party. In my experience, general contractors are generally willing to listen to concerns about provisions in their subcontracts and are often willing to revise or delete terms to make the contract fairer. If not, you should strongly consider not signing contracts that contain clauses that are unfair or not favorable to your company (especially if you haven’t previously dealt with the other party).
6. Document Changes and Important Communications:
I often refer to this as “padding your file.” Talk is cheap. Memories fade. Written contracts and written communications rule. If you’re not paid in full or there is a dispute on a project, the decision-makers (i.e., judge, jury, arbitrator) will primarily rely on the written contract and written communications between the parties for purposes of rendering their decision. Furthermore, most contracts require all changes, including additional work or materials beyond the scope of the contract, to be memorialized in writing. Some contracts also bar claims for additional compensation beyond the contract price if extra work is performed without a written change order.
Oral changes beg for disputes, particularly with respect to scope and price. I also strongly promote the use of letters and e-mails (I don’t recommend text messages) to confirm important oral communications on construction projects. I often end such confirming written communications by informing the other party that I will proceed with the understanding that they agree with the statements and information in my written communication unless they promptly notify me otherwise in writing.
7. Listen to Your Gut:
Over the years, a number of clients seeking my help to collect past due amounts have told me at that something didn’t feel right at the outset about the other party. They generally also tell me, in retrospect, that they should have listened to their gut and not taken the job or should have required different payment terms or a down payment. Listen to your gut. Your gut feeling is usually correct. If something doesn’t feel right, take steps to address your concerns. If you don’t, you’re taking a risk that you won’t get paid or something will go wrong on the project.
Summary
Don’t drop your guard. Take the above steps before each new project. Put them on a checklist. The extra time you spend before you sign a contract or obligate your company will pay off in the long run.
Please feel free to reach out to me if you have any questions or need assistance with your contracts or collecting past due amounts. Van M. White, Samuels Yoelin Kantor, LLP, (503)226-2966, vmw@samuelslaw.com