by Reed F. Morris:
Collecting outstanding construction receivables is a problem for contractors, subcontractors and suppliers. Maintaining cash flow and relationships are a delicate balance. The
overall goal of your work is revenue, and examination of steps and procedures for payment claims is, unfortunately, a regular part of a contractor’s business.
1. Trust Your Gut.
Any lag in payment, new excuses or promises, or jobsite rumors on payment delays are all evidence and corroboration that your gut is right when it tells you there is a problem. Trust your instincts. Being the “nice guy” on the jobsite and going along to get along might be bad for business, resulting in your company finding itself another pay period, and another pay app, deeper in the hole.
2. Bill Quickly and Regularly.
The quicker you invoice or submit your pay app, the quicker you’ll get paid. The interval you invoice can be every 14 days, or on every interval of work performed (e.g., every 5 days of work, or every amount meeting certain thresholds > $________). The regularity and pace of billings, and past performance on paying your earlier bills, can be solid evidence in your favor when later invoices/pay apps go unpaid or disputed, or both.
3. Don’t Sleep on Your Rights.
Promises that payment is forthcoming can be used to string you out past important deadlines—claim deadlines in the contract, payment bond, or mechanics lien rights. Sending reminders of late payments can trigger a written confirmation back and lets them know you’re mindful of your rights and remedies which you have calendared (see below).
4. Calendar Collection Remedy Deadlines.
Mechanics liens, payment bond claims, or notice provisions in your contract itself (such as triggering disputes clauses) must be calendared and followed. A diligent office calendaring system can be critical to preservation of your payment rights. Know when each deadline is approaching for every unpaid invoice or pay application that is out.
5. Don’t Waive your Rights.
Lien/claim waivers—as stand-alone or on the back of checks—can be used to formally waive mechanics lien rights or payment claims overall. Know how much you are owed, when you are owed it, and for what pay apps/work each check is covering. Only execute a lien waiver for the work you are being paid, not everything you have performed up through the date of the check being issued or waiver being executed.
6. Obtain Confirmation of Amounts Owed.
The best evidence you can get—in the form of an “admission”—can be in the form of written confirmation. Payment claims will be chipped away at with deductions, set-offs, charge-backs, and claimed damages. Confirmation of the amount owed can set the bar for your claim or significantly reduce the impacts of attempts to erode your claimed amount. Often times your “reminder” system for following up on an invoice can trigger a response confirming that your invoice has been received, reviewed and payment on it is forthcoming.
7. Mind and Follow Your Contract’s Disputes Clause.
Know your contract’s disputes clause and follow it. Most contracts have provisions related to notice, default, opportunities to cure and progression if disputes are ongoing. Many contracts have mediation, arbitration, or progressive disputes resolution pathway (e.g., required meeting of principals before mediation, after written notice). Failure to follow the process could be used to argue you’ve waived your claim.
8. Gather Third-Party Information.
If justifications (“the owner has not paid”), charge-backs (“a follow-on sub had to re-do your work”) or other excuses are given as to why you’re not being paid, then you should request documentary proof. Gathering such evidence can allow you to refute it and move forward informally, or plan your collection case around the defenses and roadblocks that will be advanced by the opposing party. Your request for such information should be in writing. The failure to provide such information without justification could be used as evidence of bad faith or failure of the other party to meet the requirements of any disputes clause in your contract.
9. Final Pre-Collection Phase.
Whether heading into mediation or a face-to-face meeting with the owner or up-stream contractor, having the claim file in order is critical. If informal resolution channels fail, the lawyer handling the collection will request your file. Coming into your meeting, mediation (or lawyer’s office) with your ducks in a row truly sets your best foot forward and demonstrates the seriousness (and level of proof) you place on your claim.
10. Collection Phase.
If your notices, requests for information, and face-to-face meetings have not produced results, putting the claim into another’s hands for collection may be your last resort. If liens have not been filed, an attorney can assist with this process as well. Assisting with preparing formal notices to payment sureties or formal demand letters are often the attorney’s first tasks. Exploring bond claims, litigation, or formal mediation or arbitration are all potential avenues. Depending on the size of the claim and defenses/set-offs that have been set forth to date and the creditworthiness of the opposing party, an attorney may be willing to take it on a contingency or an hourly + success based fee arrangement. If you must hire an attorney, you should use an attorney experienced in construction-law specific legal doctrines and procedures for your state.
For more information about our law firm’s construction practice and to obtain other resources for construction industry professionals, please visit our construction practice page.
Reed F. Morris is a Denver-based attorney who regularly represents owners, contractors and sureties in payment and performance related construction litigation including private and public jobs, bond claims, mechanic’s liens and related disputes. He is a partner at MLMW and represents parties to construction disputes in state and federal courts and all alternative dispute venues including mediations and arbitrations (AAA). Reed can be reached for questions at firstname.lastname@example.org or by phone at (303) 927-0011 (direct).