Subcontractors: What to Do If You Are Not Getting Paid On a Construction Project
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As a subcontractor, payment for your work is critical. If a subcontractor is not getting paid on a construction project, there are some important things to consider, including whether the general contractor has grounds to withhold payment, whether the subcontractor can stop the work, and how a subcontractor can best ensure payment from the general contractor.
Does the General Contractor Have Grounds to Withhold Payment?
If a subcontractor is not getting paid for work on a construction project, the subcontractor must first determine whether the general contractor has grounds to withhold payment and consult the subcontract. The grounds to withhold payment are usually found in the subcontract, and may include the following:
- Defective work: defective work not remedied
- Scope of work: failure to carry out the work in accordance with the contract
- Payments to sub-subcontractors: failure of the subcontractor to make payments properly to sub-subcontractors
- Pay-if-paid: general contractor is not required to pay subcontractors for work performed, unless the owner pays the general contractor first.
If the general contractor does not have grounds to withhold payment, the general contractor may be in material breach of the subcontract. In that case, the subcontractor may have the right to stop work or terminate the subcontract, after notice and an opportunity for the general contractor to cure its default.
Can Subcontractors Stop the Work?
One common question subcontractors have when they are not getting paid, is whether they can stop the work. Subcontractors should proceed with caution here, and review the subcontract to determine whether they have the right to suspend or stop work after a certain period of non-payment.
For example, the subcontract may contain a provision that states: “If the general contractor does not pay the subcontractor, through no fault of the subcontractor, within 30 days from when payment is due, the subcontractor may, upon 7 additional days’ notice to the general contractor, stop the work until payment of the amount owing has been received.” If your subcontract contains a similar provision, you will be authorized to stop the work after providing the general contractor with the required notice.
Further, even if the subcontract does not contain a provision authorizing the subcontractor to stop or suspend the work, and the general contractor withholds payment that is due and owing, without a proper basis to withhold payment in the subcontract, the general contractor will likely be in material breach of the subcontract. In this case, the subcontractor may have the right to stop work or terminate the subcontract, after notice and an opportunity for the general contractor to cure its default.
How Can Subcontractors Get Paid?
Luckily, there are several avenues subcontractors can use to get paid, such as a mechanic’s lien, payment bond claim, and dispute resolution.
A mechanic’s lien is a legal claim against the real property where the work was completed, which attaches to the owner’s legal interest in that real property. However, subcontractors can only record a claim of lien, if the work was completed on private property, not on public property.
To properly record a mechanic’s lien, subcontractors must comply with the requirements provided in Chapter 713, Florida Statutes. Although a detailed guide on how to properly record a mechanic’s lien is outside the scope of this blog, a general overview of the steps are as follows:
(1) serve notice to the owner and general contractor within 45 days of first furnishing services, materials, or labor;
(2) record a claim of lien within 90 days of providing last furnishing services, materials, or labor;
(3) serve the claim of lien within 15 days of recording; and
(4) enforce the lien within 1 year of recording by filing a lien foreclosure lawsuit.
The owner of the construction project may require the general contractor to furnish a payment bond for protection of the real property against all claims of liens. In Florida, payment bonds are governed by Section 713.23, Florida Statutes for private projects, and Section 255.05, Florida Statutes for Florida public projects.
Like mechanic’s liens, a detailed guide on how to properly perfect a bond claim is outside the scope of this blog. If subcontractors bring a claim on the general contractor’s payment bond, they must ensure to comply with the notice requirements provided in the statutes. Failure to bring a lawsuit on the bond within 1 year of performance of the labor or completion of delivery of the materials and supplies, will result in a loss of all rights under the bond. Subcontractors should avoid including a provision in the subcontract that stays their claim against a payment bond.
Another way for subcontractors to get paid is by initiating the dispute resolution process, including mediation, arbitration, and litigation. The subcontract may contain a dispute resolution provision, which may require participation in mediation before the parties can move to arbitration or commence a lawsuit.
Mediation is an informal settlement conference, wherein the parties agree to use a third-party mediator to guide and assist the parties to come to an agreement. On the other hand, arbitration is a private, legal determination of a dispute, by an impartial third-party. Arbitrations are similar to litigation, wherein the decision of the arbitrator is final and binding on the parties. Finally, the subcontractor may bring a lawsuit against the general contractor.
Best Practice: Negotiate the Subcontract With the End of the Project in Mind
To best avoid payment issues in the future, subcontractors should set a strong foundation at the start of the project by negotiating favorable payment terms and remedies in the subcontract. Some key contract provisions to consider negotiating in the subcontract include, the following:
- A provision that authorizes subcontractor to suspend work if not paid; and
- A provision that authorizes subcontractor to terminate the subcontract if work stopped for a period of time.
- James O. “Joby” Birr, Esq.
- Melissa G. Murrin, JD Candidate