This blog is from a webinar that was presented by SunRay Construction Solutions, featuring Mark A. Cobb, an attorney at law and founding partner at Mark Cobb Law Group. In this blog we will discuss how to get paid as a contractor, subcontractor or supplier in the state of Georgia.
When it comes to payment, you have to start Day One, there is an adage. The squeaky wheel gets the grease and that is very true. With payment, if you wait until the last day until after you send your last invoice, and you give them 30 days or even 10 days it does not matter.
Then you try to collect your money and they do not want to pay; you are probably going to have a very low success rate. On the other hand, if you start every single day with considering what you can do to help improve your payment options if you continue that through the project life of the construction project and then if you continue it through the point of final invoice and retainage.
Your odds of recovery are greatly increased. So we are going to be looking at those three areas today very briefly. Preliminary considerations, what you can do during the project life, and then finally what to do after the project is over will be discussed.
Preliminary considerations are when the customer walks into your door if you are a supplier. This is also if you are a subcontractor or contractor when you are contacted and create a bid or participate in a project.
There are so many more things that could be spoken about, but we will talk about building relationships, understanding or defining the scope, understanding your limits, due diligence, and contracts.
a. Building relationships
Building relationships seems obvious but it is vital in the construction industry. There are so many startup companies that it can be very difficult to understand who your customer or who your client is. You need to understand them on both directions.
If you are a subcontractor, you need to build a relationship with the general contractor and with your sub-subcontractors or your suppliers. Those relationships go a long way to make sure that you get paid.
For example, there is a general contractor who rarely gives his attorney any work. Occasionally, the attorney revises his contract form, and he is a large regional contractor working on schools, college campuses, and hospitals.
But he refuses to use any subcontractors except those with whom he has a relationship. He has virtually zero payment problems or completion problems with the subcontractors. It is that relationship that allows the success of his projects. That could be true no matter which tier you are on in your construction project.
b. Understanding/Defining scope
Understanding and defining scope is probably the biggest problem area that is seen by construction lawyers when it comes to payment issues.
To have a binding contract, there must be a meeting of the minds and as you can imagine on construction projects defining the scope can be difficult. It should never be a sentence. When remodeling an apartment, it should be detailed and actually define what is included in the price, and even better, it should mention what is excluded in that price.
If you do that, also say that the following is a partial list of items not included in this contract. If you are supplying materials is important to know the quality of materials or the grade of materials. It is important to know the size of the piece of equipment.
Whatever it is in the very beginning, make sure there is a meeting of the minds and that you have understood what the other party wants from you and then you are able to define it adequately in writing.
c. Understanding your limits
Understanding your limits is a tough one to talk about sometimes. More construction businesses go out of business during boom times than they do in recessionary times. It sort of defies logic, but when you begin to think about it, it makes sense.
In boom times, prices go up, labor is difficult to find, people enter the industry that really do not belong in the industry in boom times. People say yes to projects when they should have said no. So, people stretch themselves too thinly.
No matter what your business is, whether you are a mom-and-pop operation or you are a national business, you need to understand what your limits are, what you can actually deliver, and what you can actually do.
It is far better to say no to a project than to take on a project and have that project go upside down on you.
Just as a point of notice, construction lawyers right now are seeing a significant number of payment problems coming from people who say yes to projects which they should have said no to. In boom times they think they are staying busy, they want to stay busy, they say yes to a project, they cannot complete it, they do not have the manpower, and it becomes a serious issue within the industry.
For due diligence and contracts, we will dive a little further. Each one of these you could easily spend a few hours on.
d. Due diligence
Due diligence is something you need to do at the very beginning. It is so important to get basic information about whom you are working for. You may contact your attorney at the end of the project, you have not been paid, you want to file a mechanic’s lien, and you give the attorney the name of the business.
Maybe you are Subcontractor One. That is all they have. So if someone goes to the Secretary of State’s website to learn who Subcontractor One is and finds out that you are not there. There may be Subcontractor One, there may be Subcontractor 101, there may be Subcontractor 1a. There may be a subcontractor but the name the other side was given does not exist.
So who is actually the subcontractor? Furthermore, a lot of those companies that are named similarly are owned by the same people and they have created different entities, frankly, to confuse everyone. It is very important to get the actual legal name, go to the Secretary of State’s office and confirm that it exists, and understand the entity type.
Also, when people come into your counter or when they first ask you to bid on a project. It is so easy to get information from them. You should have adequate credits apps. For example, get the business’s tax ID number. Get the owner’s names and get their contact information.
It is recommended, depending on who their customers are, to get the owner's residential address. Get the owner’s social security number, get their spouse’s information. That is all information that is seemingly not important to begin the process to deliver materials or do subcontractor work. But it is very much part of the process of collecting money.
Get the current bank account information. If there is a deposit, make sure there is a copy of that check. Credit apps have who their banks are and verify that information. Having that information can lead to a garnishment which leads to recovery.
i. Prior or pending lawsuits
A couple of things we see that most people do not do are pending or prior pending lawsuits. It is relatively easy online to check and see what prior lawsuits are out there, and what pending lawsuits are out there. That way you get some idea of the litigiousness of the entity with whom you are working.
So, if you see someone who has had multiple lawsuits. It might be a red flag that says maybe you should not work for this individual.
ii. Prior liens
Similarly, the mechanic’s lien docket in most states are pretty easy to use. Georgia is easy to use. When subcontractors or suppliers ask attorneys to help with due diligence. The first thing an attorney will do is do a statewide search of all the liens involving that contractor. It can tell them if the contractor is not being paid, so maybe they are not doing due diligence on the general contractor or the owner.
It also tells the construction attorney if they are not paying their subcontractors or suppliers if they see liens against them even if they get paid off. If there are a bunch of liens out there, that is a red flag. That may mean you do not want to do work with them. It may mean you want to do work with them in a different way. You want to secure yourself.
A great question to include on a credit app and you want verification on, is, ‘are they bondable?’ So for those of you who do not know if a surety is willing to bond a contractor or subcontractor, that means the surety has already done some of this background work for you. In fact, they have done quite a bit of it for you.
They have looked at past projects, they have looked at pending and past lawsuits. They actually have information on the owners, the owner’s addresses, even the owner’s relatives. If they are bondable, it is not a guarantee, but it does give additional assurances that maybe this would be a good customer, good client, and good contractor to work for and someone who will pay their bills.
iv. Success of past projects
Another big one that people just do not seem to do, but you want to look at the success of the past projects of your customer or your client. Again, when attorneys do this for clients, they will pick up the phone and ask the owner of the project how so and so contractor was.
Did they pay their subcontractors? Were there any liens against the project? How was the performance? Were you happy with the project? Again, that is a great indicator of what the quality of the person with whom you are working.
Contracts are another big thing; they are so important. If you have a one-page written proposal, that is going to be interpreted differently than if you have a solid construction contract to look at.
i. Understand risks involved
When you look at contracts, you want to make sure you understand the risk involved in today’s construction industry.
Owners want to push as much risk as they can on the prime contractor. The prime contractors in turn want to push the risk down on the subcontractors, subcontractors want to push it down on the sub-subcontractors. It is absolutely ludicrous that arguably the biggest companies, the prime contractors, and the owners push so much risk to those presumably, smallest companies.
So you have to understand the risk, but also understand the payment process.
ii. Payment process
Is there an interest provision there that allows you to collect interest? If you are not paid in a timely manner, what happens to amounts in dispute? If you present something, are they going to give you partial payment? Are they going to give you full payment or does that mean that money is going to end up in escrow? What is going to happen through the life of the project if the dispute arises midway through?
Also, how are you going to resolve disputes regarding payment? Is there an architect in there who makes an initial decision? Is there an appellate process? What is it you are going to do?
iii. Dispute process
Similarly, just in general, you want to make sure the contract has a spelled-out dispute process.
With payment issues in particular, mediation is a very important component of your terms and conditions. If you have to file a lawsuit that involves hiring a lawyer. You are likely going to pay tens of thousands if not even more to get to a lawsuit, get through motions, and get to some point where maybe you will get some money back.
Mediation can be done quickly, it can be done as quickly as one week, and you get issues resolved.
You can also have an arbitration provision. It is not as fast as mediation, but definitely less expensive than litigation.
In this process you also want to know about deadlines. Do you have to give written notice? How long do you have to make a demand for arbitration or demand for mediation? If you make that demand, then when does mediation or arbitration occur?
Does this dispute process include attorney’s fees for the victor? Most importantly, does the dispute process a convenient jurisdiction or choice of law?
So, if you are a Georgia company working on a project in Los Angeles with a contractor from Illinois, which state lien laws apply and where is the jurisdiction? Where are you actually going to have mediation, arbitration or litigation occur?
Those big things make a big difference as to how much money you spend to collect your money. If the aforementioned due diligence reveals something negative, you may want to do things a little bit differently.
iv. Personal guaranty
Two very obvious but common ideas are to make sure you get a personal guaranty. For example, there is an attorney who works with someone who has a contractor they wanted to work with. But the credit just was not there. The project success just was not there, so the construction attorney got six personal guarantees, one from each of the owners and their spouses so that they could not transfer assets.
v. Joint check agreement
Also up front you think about getting a joint check agreement if there is any question whatsoever. You can go to a higher tier and say that you are willing to supply, you are willing to work on this job, but that you are very concerned about the payment, so you ask them to joint check you.
During project life, there are also very important considerations you have to do.
a. Georgia’s Statutory Notice Scheme
So Georgia does have a statutory notice scheme. So, if you are a subcontractor or a material supplier, and you supply to a subcontractor or lower tier. Then within 30 days of the day you start that project or start the deliveries, you must send a Notice to Owner (NTO) or Notice to Contractor. This is exactly what SunRay takes care of.
It is very important to send these preliminary notices; if it is not done, you will not have lien rights or payment bond rights. So again, within the first 30 days, you must send an NTO to the owner and the contractor. All it says is that you are on the job.
You now have to track the timely payments down. If you are a sub-subcontractor or a supplier to the subcontractor, they do not know who you are. The general contractor may not know who you are, but now you have been given notice, track the money from the owner to the prime contractor, to the first subcontractor to the second subcontractor to the supplier.
b. Preliminary liens must be filed within the first 30 days as well
Also, if their due diligence has revealed some concerns, Georgia allows you to file preliminary liens. These are not the same as the statutory notice scheme NTOs, it is not the same as material and liens. This is something completely different. But that preliminary lien is something which must be filed within 30 days.
You probably will need an attorney to help you with this. It is sort of a pseudo-lien against the project. In other words, at the end of the project, they cannot close out the project until they get a release from whoever filed the preliminary lien.
This is recommended to those in high-risk credit situations, and also large amounts on let us say, lumber or supplying on a multi-family complex that gets into six figures.
c. Submit timely and complete pay apps
In project life, it is so important to submit timely and complete payment apps, but more importantly, you must monitor lien waivers.
d. Monitor Georgia’s lien waivers
In Georgia, there is a kind of complex lien waiver system. They are contingent upon payment for 90 days. After 90 days they convert to no contingency. So if you sign a lien waiver, if you are not paid in full, then in 90 days if you have not taken certain steps, you will lose the right to file a mechanic’s lien for that amount.
Then, the next step you need to take is file an Affidavit of Nonpayment. That must be filed within 90 days of the date of the unpaid lien waiver. So in theory, if you are not paid for three or four months, you may have to file an Affidavit of Nonpayment for a lien waiver that you signed 65 days ago.
Maybe give them another week or two. Then you file a second one for the other pay app for the unpaid lien waiver. But it is very important to monitor those.
Finally, we have project completion. This is where things get ugly if you do not get paid.
a. File materialman’s lien
In Georgia, filing materialman’s liens is a great option, they are not terribly expensive to file. But they must be filed within the 90 days of the last day of work. It is not an invoice date, it is not a warranty work date, it is 90 days from the last day you are physically on the job or physically delivered materials.
b. Claim against payment bonds
Similarly, if you have a payment bond – this could be on a municipal project, this could also be on a private project. These are seen on a lot of payment bonds on large private projects. You generally have 90 days from the last day of work to make a claim against the bond. If there is a payment bond on a private project, you can file a lien and file a payment bond.
So think about it. If you did your due diligence, if you got a guaranty, maybe more than one personal guaranty, if you have a payment bond claim you can make, and you can file a lien, suddenly you are bringing a lot of people to the table to make sure you get paid.
You have the person with whom you have contracted. You have the owner, the surety, you may have a principal or a principal spouse of the company work.
All that helps to make sure you get paid.
c. Liens are generally valid for 364 days from the date of filing
If you do follow the materialman’s lien or make a payment bond claim, you basically have one year to file a Notice of Action which is generally a lawsuit or demand for arbitration. So make sure you do that within 364 days of the date of filing.
d. File suit or make Demand for Arbitration
After you make that filing of a lawsuit or Demand for Arbitration. You then have to follow up in the lien record within another 30 days, to finally notice a Filing of Action to enforce lien. That perfects the lien for you and then allows you to foreclose the lien down the road.
Now we list a couple of deadlines that make it easy for future reference.
a. Send Notice to Owner Georgia/Notice to Contractor Georgia
Send your Notice to Owner or Notice to Contractor within 30 days of the start of work.
b. Preliminary lien
Send your preliminary lien within 30 days from the start of work.
c. Affidavit of Nonpayment
The Affidavit of Nonpayment is 90 days from the date of the lien waiver, not the last day of work. It is from the date of the lien waiver.
Liens have to be sent 90 days from the last day of work.
e. Bond claim
Bond claims also have to be sent 90 days from the last day of work.
f. Commence an Action on Lien
You have to Commence an Action within one year from the day the lien is filed.
g. Filing Notice of Action
Thirty days after filing an action, you have to file a document called a Notice of Action to enforce the lien.