How to Avoid Construction Payment Disputes

Payment Dispute Headaches

One of the biggest headaches of being a contractor is being paid in a timely manner for completed work. Buyers will often bite off more than they can chew and don’t have the budgetary reserve to handle overruns or unforeseen problems.

For example, a routine electrical wiring job can become a nightmare if there’s an underlying plumbing issue that prevents the work from being completed. This situation backs up the contractor doing the electrical work, and if the customer becomes unable or unwilling to pay for the electrician’s time or work, the electrician may need to take legal action in order to collect.

Newer or inexperienced contractors may be unaware that they have options when it comes to collecting payment or being restituted. It would be smart for any contractor to brush up a bit on construction contract law and construction dispute resolution to save themselves not only aggravation, but also time and potential legal or filing fees.

Read on to learn more.

Deescalate If at All Possible

Court and filing fees can be considerable. Taking matters to court can be time-consuming. Emotions can flare between contractor and owner when construction payment becomes an issue. Therefore, it’s in the interest of both parties to work together and not litigate, if at all possible.

One of the best ways to avoid a construction payment dispute is to communicate with the owner or customer and work out a fair resolution.

But in the event the contractor has made multiple attempts to collect payment and the owner has been uncooperative, there are a few legal avenues to pursue that will help you collect payment for services rendered.

What Defines Construction Payment and Construction Payment Law?

As one would expect, construction payment is just compensation for services rendered. This is pretty straightforward, but as two conflicting parties litigate, the definition can become a bit vague.

While a handshake or a verbal agreement is appropriate in some forums, negotiating construction payment is not one of them.

There are a number of standardized forms used by contractors, such as an Application for Payment form, which clearly outline the materials being used, their respective quantities, the roles of subcontractors, and any other foreseeable minutiae.

The Application for Payment form is viewed and signed by the owner or buyer prior to the start of a project. This type of form is a good idea for both the contractor and the owner, as it allows the owner to control the materials being used and verify the items that the contractor has claimed to provide.

This document can be continually amended in conjunction with a Schedule of Values sheet to keep track of materials used and work completed as the project unfolds. This method can again make payment tracking simpler and easier for both parties.

If there is a dispute in how the contractor tabulates the work that he or she has done, or if the owner refuses to pay, then issues of construction payment law have to be considered.

Below is an overview of construction payment law, and some of the critical things a contractor may want to know.

What Are a Contractor’s Options for Construction Dispute Resolution?

Those with casual legal understanding have likely heard the term “lien” bandied about. A lien is a type of filing that a contractor can use to eventually secure payment.

A lien allows a contractor to encumber the property of the owner until a debt is paid. While this is not the preferred way to collect a construction payment, it is an option in the event of a construction dispute.

Liens are typically divided into two categories: general and particular. A contractor is much more likely to file a particular lien, in which a person claims their right to retain a certain property due to labor, money, or work invested into said property.

Construction disputes are unfortunately very common, and filing a lien is a fairly routine practice for many contractors.

Filing a Lien in a Construction Dispute

A contractor’s lien is also known as a mechanic’s lien. Assuming you as a contractor have exhausted all other options, this is the type of lien you will file.

Most states require the filing party to give preliminary notice – for all intents and purposes, a demand letter – letting the owner know that you will file a lien. This is a last-ditch attempt to settle the matter outside of court.

From there, the lien laws from each state vary a great deal. You can research your local laws here. But in most cases, the lien must be filed at the property recorder’s office or the clerk of court. The filing fee is generally $25-$50. Depending on the last date work was performed on the property, it may be important to lien it now, before the statutory deadline passes.

Lastly, it’s recommended for expedience that you file the lien in person rather than via mail. Check your state’s filing deadlines, but hand delivery likely ensures that your lien will be filed properly and on time.

From there, you will again have to adhere to local or state laws as the process plays out, but in most cases, you will have to notify the owner that you filed the lien. You may also have the right to file a judgement lien, depending on local laws and the situation.

Know Your Options in the Event of a Construction Contract Law Dispute

One of the most important takeaways from this article is that a contractor can likely file a lien in the event of a construction payment dispute to ultimately collect compensation for time or services rendered.

This news should come as a relief to some contractors who may be worried or enraged by a customer’s unwillingness to fulfill or meet their financial obligations.

If you’ve already hired legal counsel to represent you in a construction law dispute, then defer to the advice of your representative. But also know that if you do not currently have legal counsel, filing a mechanic’s lien, while less desirable than working out a payment plan for money owed, is an effective tool at the disposal of contractors and subcontractors.