In this blog, presented by SunRay Construction Solutions legal expert Kyle Ub, you will learn how liens, bonds and contracts can help construction professionals to get paid successfully.
Understanding Contract Terms
Let’s begin with some of the basic contract terms that construction professionals should be aware of. The most fundamental terms in a construction contract are how you get paid and how that payment is calculated. The most common types of project price format include:
- Cost-plus – Cost plus contract is the contract with the subcontractor who keeps an account of the costs of the project, and they add a percentage fee to it. The total of the cost plus the percentage fee (which is agreed upon) is the amount that the owner pays to the contractor or what the contractor pays to the subcontractor. For example, if the project cost is $100 and you have agreed on a 6% fee, then the final payment would be $106.
- Stipulated Sum – A stipulated sum which is also sometimes known as a fixed price contract is exactly what it sounds like. You agreed on a certain amount as the project's overall cost. So, even if the final cost is less than the agreed upon amount, the owner must pay the full amount to the contractor, or the contractor must pay the full amount to the subcontractor. However, if the project ends up costing more, the deficit falls under the contractor or subcontractor’s responsibility.
- Guaranteed Maximum Price (GMP) – A GMP contract is a combination of both the cost plus and stipulated sum contracts. For example, if it is a cost-plus contract and they have a limit of a million dollars, then once you reach this limit, you must finish the project within the million dollars.
- Unit Price – Lastly, we have the unit price contract. This type of contract is used where the construction project involves several units or multiple instances of similar work. The parties agree that every time a unit or an instance of work is completed, the payment will be made for that piece of work.
It is very important that you read your contract thoroughly and understand how you will get paid. You must ensure that you are satisfied with the way the payment will be made.
Project Timeline and Damages
The next thing you should focus on in your contract are the project timeline details.
- Most of the contract will specify the project timeline or the deadline for the work's completion, and you are responsible for ensuring that the work is completed as per those timelines.
- If you fail to comply with these timelines, the owner can argue that they do not owe you the full contract price because you owe them delay damages for not completing the project on time.
There are two ways in which you can guard yourself against this:
- Liquidated Damages: Liquidated damages are an agreed upon amount for the damages daily. So, if you have it in your contract that there is going to be a $1,000 delay damages per day, and let’s say you have delayed the work by 30 days, then $30,000 would be deducted from your final payment.
You can plan for the time about the delay's cost or say that you do not agree to the liquidated damages.
Whether you agree to the liquidated damages or not, you must ensure that it is clearly mentioned in the contract.
- Consequential Damages: This is the term used for delay damage caused by you. So, if you are at work and there is a delay for some reason and the work is not completed on time, then it is referred to as consequential damages.
Consequential damages can be waived off in Minnesota. Most of the construction firms typically ask for the consequential damages to be waived off.
Ideally, if you have a contract wherein the consequential damages have been waived and you have not agreed to liquidated damages, and if there is any delay in completing the work, the owner will have no remedy against you for delay damages. This means that you will get paid the full amount even though you are late.
However, most owners will push back such type of contracts. They may waive the consequential damages but will ask you to agree to some amounts of liquidated damages. SO, make sure that you go through these primary contract terms in detail.
The next topic that we will focus on is liens.
- In Minnesota, liens are a creature of statue which means that your lien rights arise from a statute in Minnesota and those statutes are strictly construed with respect to procedure.
- If you fail to follow all the rules and procedures, you will lose your lien rights.
- In Minnesota, mechanics lien rights are available to anyone performing engineering or land surveying work relating to improvement of real estate.
- These rights are also available to anyone contributing to the improvement of real estate by performing labor or furnishing skill, material, or machinery to the project.
- A key point to remember with regards to liens is that if you are required under law in Minnesota to hold specific licenses, such as a plumbing license, electrician license, GC license, etc., you must ensure that your licenses are valid.
- If you don’t hold a license or if it gets lapsed, then you will lose out on your lien rights.
- Liens are applicable only on private real estate and not on public projects.
- There is a homestead exemption in Minnesota where under certain circumstances you cannot collect a debt against someone's homestead. This does not apply to mechanics lien.
What are some of the dos and don’ts to follow at the beginning of the project to ensure that you have lien rights?
- If you are the general contractor, then you must have the pre-lien notice in your written contract. If you do not have a written contract, then you need to give a separate pre-lien notice within 10 days after the work is agreed upon.
- If you are a subcontractor or a material supplier, then you must send the pre-lien notice via personal delivery or certified mail within 45 days after your first contribution to the improvement.
- The formatting requirements of the pre-lien notices, such as font size, language punctuation, etc., must be strictly followed as per the statute.
Here are the next steps you need to follow if you have provided your pre-lien notice, performed the work, and sent your final payment application but haven’t been paid yet.
- The first step is to ensure that you have filed your mechanics lien. This should be done within 120 days after your last contribution to the improvement.
- Apart from filing your lien with the county recorder, you also need to serve it to the owner via personal delivery or certified mail.
- Again, the procedural requirements are strictly construed and failing to abide by them can result in you losing your lien rights.
- You must also ensure that you are not overstating the lien amount.
Finally, you have recorded your lien and the owner is aware of it, but they have still not made the payment. The next course of action here is to:
- Get in touch with an attorney who can go ahead and start the lien foreclosure procedure. It is a proceeding like how a bank forecloses on a mortgage.
- Another key point to remember is that in Minnesota, the priority is dictated based on the order in which you start the contributions to the project. It does not matter who has filed the lien foreclosure action first; the party who has performed the work first gets the priority.
Let’s look at how bonds can help you get paid.
Bonds are used on Public Projects. If your project exceeds $75,000, performance and payment bonds are used.
There are two bonds to think of:
- Payment bond – this is like an insurance bond which ensures that everybody working on the project gets paid. So, if for some reason, the government entity or the contractor doesn’t pay you, the payment bond will ensure that you get paid.
- Performance bond – it provides a surety to the public that if for some reason the general contractor or material supplier is not able to complete the job, the performance bond will provide the required funding and resources to get the job completed.
Here are some contract rights that you should be aware of:
- Lawsuit for breach of contract – If there are payment issues, you can always sue the other party for breach of contract at the very least. What it means is that if you have a contract which states that you will perform some work for a certain amount, and you are not paid that amount even after completing the work, then you can file a lawsuit for breach of contract; irrespective of whether you have lien/bond rights or not.
- Unsecured Claim – However, you must remember that this is an unsecured claim, meaning it is simply a claim for money damages. So, if the person whom you are suing does not have sufficient funds to pay you, then you will be in a difficult position because you don’t have any other means (liens/bonds) to access other resources that can get you paid.
- Other Measures – You can also sue for unjust enrichment, promissory estoppel, and quantum meruit. Unjust enrichment means that you have performed some work on real estate improvement, an appraiser assesses that your work has increased the value of the said property, therefore the owner owes you money for that. If they don’t pay you, then you can sue them for unjust enrichment.
Exchanging Releases (Lien Waivers) for Payment
Finally, let’s talk about lien waivers. During the project, you might be receiving progress payments and then at the end of the project, the final payment. In most of the cases, you will be asked to provide lien waivers for the progress as well as final payments.
- Make sure you are using a lien waiver form approved by your attorney. There is no standard form in Minnesota which is why you must get these forms approved by your attorney as they can be a bit tricky.
- If you are getting a partial payment, make sure to send out a partial lien waiver. It is a different form because you are only releasing the lien rights for the partial payment you have received and not for the complete project payment.
- Once you have received your final payment and you are satisfied with it, you can provide the final payment lien waiver form.
- Another area to focus on is whether your lien waivers are conditional or unconditional. A conditional lien waiver means that the lien waiver is conditioned upon you receiving the payment. If you have provided a conditional lien waiver, and you have not received the amount, it is not considered valid/effective until you have received it.
- So, make sure that you are using the right language in your lien waiver forms.
The construction business is tricky, but staying on top of these key items can help you resolve your payment issues quickly and successfully.
Need help? Use our system to seamlessly protect your lien rights. Contact our experts at 800-403-7660 for legal assistance. Stay ahead in handling your lien and notices with SunRay!