Jonathan Cheatham | Construction Executive
While suing in court for payment on a construction project is nothing new, the very notion of non-payment tends evokes images of hard-working contractors and subcontractors, working with tight margins, owed payment for services rendered and materials. Fortunately, for general contractors and subcontractors in the construction industry, there are better remedies for securing payment on a project before it becomes a bigger issue.
Construction projects, especially large public ones, usually include a dizzying array of general contractors, subcontractors and independent contractors, sometimes numbering more than a hundred entities. The inter-connected groups of companies working toward the goal of project completion require competent construction management in order to stay on time and on budget for completion. One of the project owner’s key tools used to ensure the process runs smoothly is the use of payment bonds and surety bonds.
Payment bonds ensure that contractors and subcontractors get paid for work performed in accordance with contract conditions. Disputes can occur before, during and even after the completion of work. Injunctive lawsuits, which contemplate the stoppage of work, would be detrimental to completing a public or private construction project of substantial size. Rather than having such minor disputes derail the entire project, the aggrieved party’s remedy is to file a claim against the payment bond, which offers a solution designed to keep the issue separate from the project’s completion. The payment bond also allows the project owner to transfer risk.
Payment bonds also act to vet contractors and subcontractors to project owners. Likewise, they also protect subcontractors from non-payment by the general contractor, thereby ensuring the timely completion of large construction projects. They also have the added value of increasing a contractor or subcontractor’s reputation over time, leading to better credit and increasing the likelihood of involvement of future construction projects.
As a contractor or subcontractor, what are options if and when non-payment becomes an issue? On owner-funded construction projects, the subcontractor generally has two remedies available; filing a mechanic’s lien and making a claim against the payment bond. A mechanic’s lien is a secured interest in real property that ensures payments to a party who has improved the real estate with labor, materials or supplies. The mechanic’s lien creates a security interest in the improved real estate for the amount due and owed. Another advantage is that they are simple to file and easy to perfect. The liens are effective, inasmuch as they make it difficult for an owner to obtain continued project financing or a certificate of occupancy upon the completion of a project.
A mechanic’s lien is ineffective, however, on a public project, where laws involving mechanic’s liens don’t apply and filing against the payment bond is usually the only remedy. Use of a mechanic’s lien is therefore generally effective for private construction projects. It’s important in many jurisdictions that the subcontractor filing a mechanic’s lien have some type of identifiable “contract” with the property owner, which forms the basis of eligibility to file a mechanic’s lien.
SURETY BOND CLAIMS
The second remedy is a claim filed against the project’s payment bond, especially used in situations involving large public projects. Payment bonds provide an underwritten payment guarantee for work performed and the specific amount due to any subcontractors. The payment bond creates a contractual obligation to pay the subcontractor, per the terms of the payment bond contract. A claim against the payment bond may be the exclusive remedy on large public projects. The procedure for filing a claim is contained within the language of the payment bond.
Subcontractors should always be aware of the filing deadlines for both a mechanic’s lien and a claim against a payment bond. A failure to timely file and perfect a claim or lien is often a waiver, and therefore disqualifying to subcontractors seeking payment. A majority of jurisdictions have timetables for the timely filings of mechanic’s liens or claims against a payment bond that vary.
It’s highly recommended to seek the advice of an attorney who specializes in construction law to determine the deadlines in the jurisdiction where the subcontractor has completed the work, but still seeks payment. These deadlines are typically set from the date of the last work performed by the subcontractor, so the completion date is important to document. Deadlines are generally between 90 days to one year following the last date of work.
Knowing legal remedies in the performance of unpaid work is crucial to the ongoing business practices of any contractor or subcontractor. Disputes will invariably arise, so protecting the company and business interests through the use of mechanic’s liens and claims against payment bonds ensure that rights are protected, remedies for non-payment exist and that they are enforceable.