Many contractors, subcontractors and suppliers are suffering at the hands of those who fail to pay for the work or materials they supply to construction projects. This is a brief outline of ten tips to keep in mind when dealing with delinquent construction accounts.
1. Obtain written confirmation of the debt
Obtaining written confirmation from the debtor of the exact amount the debtor believes it owes you is powerful evidence in support of your later claim. When the debtor’s attorney begins to fight your claim months later you may rest assured that the attorney will come up with a multiplicity of disputes and back-charges of which you were entirely unaware. Having written confirmation of the debt will prove extremely persuasive in support of your case. In the alternative, if you are ultimately unable to persuade the debtor to confirm the amount of the debt in writing you might resort to a lesser substitute of writing the debtor and confirming the debt yourself and inviting them to challenge your figure. Such letters often contain a phrase such as: “Unless I hear from you within the next 10 days that you dispute the above figure I will reasonably conclude that you agree that the figure is correct.” While this technique is helpful, it is not the best substitute for affirmative written confirmation from the debtor of the exact amount of the debt.
2. Follow the dispute resolution procedures in your contract
Many construction contracts contain specific dispute resolution procedures describing the steps you must follow in order to make a claim. These often include notification deadlines as well as specific alternative dispute resolution procedures such as mediation or arbitration as a prerequisite or an alternative to litigation. It is important to follow these deadlines and procedures lest you later be determined to have waived your right to make a claim.
3. Calendar your collection deadlines
There are a number of important collection deadlines you must recognize and calendar in order to protect your rights to such important construction remedies as mechanics liens, stop notices, bond claims and other construction claim remedies. If you fail to meet these deadlines you will waive your right to these important claims. For example, in California proper service of a Preliminary 20 Day Notice on the owner, construction lender and prime contractor at the outset of work is often critical to the success of a later claim by a subcontractor or material supplier. Other than serving a Preliminary 20 Day Notice at the beginning of your work, most of the important construction collection deadlines begin to expire within 30 days after completion of the work of improvement. Moreover, for those who do early “site work” the deadlines often begin to expire within 30 days after site work is completed. Contact your local Builder’s Exchange and sign up for a class to learn the rules for mechanics liens, stop notices, bond claims and other construction collection remedies.
4. Do not be deceived into waiving your collection rights
Many in the construction industry are well aware of the important deadlines for pursuing construction claims. Others are not. Some unscrupulous players will lull unsophisticated creditors into a false sense of security with promises that the check is “in the mail” or other false assurances. These tactics may continue until the debtor confirms that the creditor has missed important construction claim deadlines. Avoid this result by calendaring important dates to pursue your construction remedies and inform the debtor that you are fully aware of these deadlines and will act to protect you rights to collection before these deadlines expire.
5. Be careful in your use of releases and your reliance on checks
California Civil Code sections 8132-8138 specify the four types of required releases for use in California construction projects. Two of these releases are “conditional”. Two are “unconditional”. Both release claims to the last date of work specified in the release. Conditional releases can be exchanged for a check. If the check does not clear the bank the release is generally not effective and claim remains viable. However, with the “unconditional” release the claim for payment is generally released as to the date stated regardless of whether the check actually clears the bank. It is therefore very important that you only provide an unconditional release when you know that the check has actually cleared your bank. Please also note that use of a bank cashiers check does not automatically mean the check will be honored. Payment on a cashiers check can still be stopped, usually through an allegation of fraud. Although it is easier to claim fraud than to prove it, the allegation alone is usually sufficient to stop payment on a cashiers check. Please also note that a check drawn on an out-of-state bank is usually held for 10 days before confirmation that it has cleared will be given. Please finally note that Under California Commercial Code section 3311 a check bearing the notation “paid in full” or similar language probably means exactly what it says and the recipient of the check may be precluded from arguing to the contrary even where the recipient believes it was actually owed more than the amount of the check.
6. Do what you can to avoid attorneys and lawsuits
Attorneys can be expensive and litigation is rarely the most efficient way to resolve a dispute. Therefore, before resorting to an attorney, do your very best to exhaust all reasonable efforts to achieve resolution. Remember, it is often better to compromise a bit and receive a check early than face a year or more of uncertainty, expense, business disruption and anxiety. A common outcome of a construction dispute is settlement before trial, with each side bearing their own attorney fees and costs. If you can use your negotiation skills to reach a reasonable resolution before it is necessary to begin paying an attorney, you are often better off.
7. If you must use an attorney, use one with knowledge in construction collections
The practice of law has become extremely specialized. You would never hire a probate attorney to handle a criminal matter. You would never hire a patent attorney to deal with a divorce. When you need to resolve a construction dispute hire an attorney who deals with construction disputes. When construction collections are an issue use an attorney with experience in the rules of mechanics liens, stop notices, payment bond claims and prompt payment remedies. Without knowledgeable legal counsel you may miss important deadlines or fail to take advantage of beneficial legal doctrines critical to the successful prosecution or defense of your claim.
8. Documentation of your claim will often be your key to success
If you are unable to resolve the debt yourself your construction attorney will require full documentation of your claim in order to prove your entitlement to payment or to defend a claim against you. All other things being equal, the party who can best document the validity of its claim or defense will more likely win the case. Of course, good documentation begins long before you ever visit your attorney. It starts with good practices in your office and in the field. Proposals and bids should be clear and unambiguous. Contracts should be closely reviewed and revised. Contract changes must be initialed. Contracts must be signed. All changes in work should be confirmed in signed change orders containing agreed details, price and time extensions. When potential sources of dispute arise they must be fully documented. Documentation of the dispute and all discussions regarding the dispute must continue until the dispute is either resolved or brought through the contractual dispute resolution process. Documentation is the key to success.
9. Let experience guide you to improved procedures
Every construction dispute will teach you something new. It may be that your bid procedures are inadequate. It may be that your contract is poor. It may be that your office procedures are weak. Perhaps your failures are in the field. Whenever you encounter a problem, stop, take stock of the source of your problem, determine if there is anything you can do to prevent the problem in the future and make adjustments in your procedures and paperwork to prevent the reoccurrence of this problem.
10. Trust your instincts
I don’t know how many times I have heard a construction client faced with a dire collection situation lament: “I should have trusted my instincts” or “I knew this would turn out bad.” It is an all too common conclusion. You are probably reading this because you strive to bring greater success to your business. If your good instincts tell you to walk away from a potential business opportunity, you might do well to follow your instincts and walk away. It will hopefully save you from a world of hurt at a later time and there will probably be a better opportunity around the corner. People who learn to trust their good instincts tend to survive difficult economic times when others do not.
William L. Porter is a principal in Porter Law Group, Inc. in Sacramento, California.
He can be reached at (916) 381-7868.