Collecting Unpaid Payment Applications for Construction Projects

Almost every sizable construction job involves delays in payments to subcontractors, suppliers, laborers, and vendors.  Some delays are justified because of incomplete payment applications, overstating the work completed per the schedule of values, or legitimate concerns regarding the sufficiency of the work.  At other times, Owners and General Contractors withhold payment for reasons completely unrelated to your company’s work.

The process of collecting payment for your work starts with your contract.  If you are working directly for the Owner, you may have been able to get the Owner to sign your form contract.  Your form contract should have clear and concise terms regarding the submission, review, and payment of payment applications and change order requests.  The contract should limit an Owner’s review and approval process if the Owner lacks relevant construction experience.  If the Owner insists on using its form contract, you should try to negotiate payment terms that are consistent with your standard contract terms, so you are dealing with payment terms and procedures that are familiar.  You have the most negotiating leverage before committing to perform the project, so use it to negotiate favorable, or at least reasonable, payment terms.

Once a payment dispute arises, you need to review the contract to ensure you fully complied with every condition precedent to your payment.  Even though the Owner’s true motive for withholding payment may be a financial issue unrelated to your work, the Owner and its attorneys will review your contract to see if they can justify withholding payment to you for any legitimate reason or technicality.  Construction contracts typically include a non-waiver provision, so even if the Owner previously paid you in similar circumstances, they don’t have to continue to do so.  If there is a problem with your pending payment application, you should amend or supplement it before ramping up collection efforts.  You don’t want to expend the time and cost pursuing recovery only to later discover there is a deficiency with your pay request that justifies the Owner withholding payment.

At the first indication of a payment issue, make sure you are protecting your lien rights under Florida Statutes Chapter 713 and any available payment bonds.  Evaluate whether you timely served a Notice to Owner pursuant to Florida Statute 713.06, a Notice of Intent to Rely Upon a Payment Bond pursuant to Florida Statute 713.23(1)(c), and Notice of Nonpayment to the Surety pursuant to Florida Statute 713.23(1)(d), if applicable.  Confirm the notices were properly served pursuant to the operative Florida statutes.  These steps need to be done early in the process so that if there is time remaining to cure any deficiencies or errors in your notices, you can do so.

Next, research the real cause of the payment delay.  Evaluate whether the problem originates with the Owner or the General Contractor.  Some red flags of future payment delays are significant design changes or plan updates, unforeseen site conditions, defaulted or terminated subcontractors, staffing changes in the design team, or storm or other damage to the project.  Check with other subcontractors and vendors to see if they are having similar payment issues.  Review the public records to see if any additional financing documents have been recorded related to the project, if other contractors have filed claims of lien, if any lawsuits are pending, and whether anyone involved with the project has filed bankruptcy.  Also, research whether the Owner has other on-going projects, and check to see if those projects are having payment issues.

Once you understand the situation and your rights, it is time to reach out to the Owner or General Contractor for an explanation of why you haven’t been paid, if they expect to make payment, and when.  If any representations are made, confirm them in writing.  This is critical if the other side gives an explanation for the delay that is unrelated to your work or contract compliance.

Check the contract to determine if there is a process to resolve payment disputes.  The contract may require you to submit a claim or dispute to the Project Architect or other representative for review.  Although the likelihood that the Project Architect will break rank with the Owner is remote, you must comply with the contract’s dispute resolution process.

At this stage, you should consider recording a Claim of Lien if you have the right to do so.  You have to evaluate whether filing a lien will impact your ability to get future jobs from the Owner or General Contractor.  You should be a team player to the extent possible, but you can’t forgo options that may allow you to get paid for your work when others may not.  Banks and lenders typically require the Owner to satisfy or bond off liens before they can get additional construction loan draws.  You should research whether other subcontractors or suppliers who filed liens have been paid.  If so, there should be satisfactions of the liens in the public records.

If you don’t have lien rights, all is not lost.  You may still have a contract claim against the party you contracted with, and you could have equitable rights as well.  If you don’t have an attorney involved, you should hire one at this stage.  He or she can review the contract, your notices, your lien rights, and then discuss your options.

Depending on the amount of money at issue and the prospects for payment, you could consider stopping work on the project and withholding any further material deliveries.  If there are limited funds available for payment of project costs, you need to use all the leverage you have to get paid.  You could send the Owner or General Contractor a notice of payment default and give them an opportunity to cure the default, or if you have already satisfied the contract’s notice provisions, you could declare a material breach of the contract and stop performing work.  There are significant financial and other risks to stopping work or declaring a breach, but there are times when such actions are necessary and appropriate.  If the prospects of getting paid are low, you have to make a business decision regarding whether to continue work.

If all your work is already complete, you can consider withholding warranty documents or as-built plans until you get paid.

Make sure your employees know there is a potential claim on the project.  They should be directed not to communicate with the Owner, the General Contractor, or their representatives until instructed otherwise.  They should report all contacts and new information regarding the project.  You must also ensure that all project records, emails, and other documents are maintained for potential litigation.

The next step usually is filing a lawsuit or arbitration proceeding.  Make sure you understand and comply with the contract’s dispute resolution process, notice requirements, any mediation requirement, and its choice of venue provisions.  Maintain detailed records regarding all time and expenses associated with the lawsuit or arbitration proceeding, including time records for employees who assist with litigation efforts.  If you ultimately prevail, you may be able to recover certain attorneys’ fees and costs.

Win or lose, at the end of the process, you need to perform a thorough evaluation of your processes and procedures.  You likely will face many payment disputes over the life of your company.  You need to make sure you learn lessons from each dispute and that you are proactive, so your company and employees are prepared to handle future claims.

Please consult a licensed attorney for assistance with your particular claim and circumstances.

You can contact me at aking@akinglegal.com if you have any questions regarding construction payment disputes or other construction or business matters.