Construction payment is akin to a house of cards – disturb one card and the entire operation suffers. When contractors or subcontractors do not get paid on time and in full, they don’t suffer alone—everyone involved in the project feels the sting.
What are the most common reasons contractors don’t get paid and how can you break the cycle?
No Contract in Place
- Before getting started on your job even if you’re working with a friend or associate with a stellar industry reputation, review your contract with an attorney. Many folks in construction still work off handshakes and promises, but these agreements (for obvious reasons) can be challenging to enforce.
- Do yourself a favour and get it in writing.
- Identify the exact scope of the work, lay out all financial obligations, such as the schedule of payments or the milestones that trigger the next payment.
- Have a contract attorney review it and have everyone sign it ahead of time. This will save you a lot of trouble later.
Disputes about Change Instructions and Variations
- Yes – the client can change its mind about what it wants but please Mr Client – understand the impact of these change orders.
- By their very nature, change orders represent added time, cost and labour to an already complex project.
- The biggest problem occurs when there is a dispute over the change, often due to a disagreement between the contractor and the client about the need for additional payment.
- The best way to control the change process is through the initial contract. In it, you can specify the steps required of you before additional work or a reduction in work is authorised.
- Ensure a written change order is required that must be signed by all parties.
- Document anything that can be perceived as out of scope.
- As part of the requirements for change orders, keep a close eye on the time limits often placed on when the document must be submitted, typically within a certain period of time after learning about the need for a change.
Failing to Enforce Contractor’s Lien
- Another common mistake contractors (and subcontractors) make is not enforcing a lien when they initially fail to get paid.
- A contractor’s lien is his legal right to retain possession of a construction site until the client has paid to him monies which are lawfully due to him.
- The lien is designed to buttress the contractor’s claim for payment and is not a cause of action in itself, but a course of resistance should the client demand repossession of the premises without tendering payment for the work done on it.
- We’ve all heard the excuses: The check’s in the mail. You know I’m good for it. Your payment’s coming. Before you know it, you’ve let their excuses take you right past the deadline for enforcing your lien.
- On the other hand, if you enforce your construction lien within time, the encumbrance is on them. That’s what makes enforcing one so powerful – and so important.
Failing to Document
- Construction hiccups happen all the time.
- In order to be able to receive payment for anything you do, you have to document it.
- Even if a case goes to court, you aren’t paid on what you did, but what you documented.
- That’s why it’s so important for contractors to use a construction project management system. In the case of non-payment, it’s easier to find all documents and communications related to the project.
Different Payment Terms Create Delays in Payment
- You’re bound to run into a few roadblocks when you’re working with multiple companies that have different payment schedules and terms. Your best bet is to make sure everyone is clear on payment terms ahead of time.
- Watch out for clauses that say “pay when paid” or “pay if paid”. These stipulate that once the contractor is paid they will pay the subcontractor.
- Always check with a lawyer to determine the validity of such clauses and avoid contracts with contingent payment.
- Instead, set payments associated with milestones, or other features to ensure payment.