In this blog, presented by SunRay Construction Solutions and Leslie A. Boe, Share holder/Director, Dysart Taylor, we will provide you a step-by-step guide for contractors, subcontractors, and suppliers in Kansas to get paid. This blog will discuss in detail all the crucial steps that you need to take to ensure that you are paid successfully for your work.
Steps to Take to Ensure Successful Collections
Many construction professionals focus on their payment rights only when they find themselves involved in a payment dispute. However, the right approach is to take some steps before you even start working on the construction project, so that you are well-prepared in advance for any payment disputes that may come up. In this blog, we will give you complete details about the steps that should be taken before you start the project, why you need to document everything, how to preserve your mechanics lien and bond claim rights, and more.
Negotiate and Understand your Contract
Here are some of the key contract terms that can impact your ability to get paid. These are terms which mostly get litigated.
a. Scope of Work – The first term to focus on is the scope of work. You must ensure that your scope of work is clearly defined in the contract. If you have a detailed scope of work in your proposal, bid, or estimate, ensure that you replicate the same in the contract or add a reference to it. Also, remember that the scope of work not only includes what work you will do but also exclusions that you may need to make or things that are not included in your services.
b. Change Order Procedures – Next term to focus on is change order procedures. You must be aware of what is required from you to get paid for any extra work. You must know what kind of notices should be sent if you encounter change conditions, whether you need formally execute a change order, etc. You must also check the contract to see if you are required to give details in writing about confirmation of your understanding agreement, the exact work that will be done, what are the prices, etc.
c. Notice Requirements – Notice requirements, such as how much time do you have to get a notice as per your contract, how to deliver the notice, and to whom you should deliver the notice. Double-check your contract to ensure you are following the terms as diligently as possible.
d. Pay-if-Paid v. Pay-when-Paid – Check whether your contract offers the pay-if-paid clause or the pay-when-paid clause. If it is pay-if-paid, then as per the Kansas courts, the GC (General Contractor) or the upstream contractor must receive the payment from the owner before they can make a payment to you. If the contract mentions the pay-when-paid clause, then it means that the payment should be made to you within a reasonable time.
e. Dispute Resolution Clauses – Check for dispute resolution clauses in the contract to see how you can effectively resolve the payment disputes without going ahead with litigation. Learn more about this in the next section.
Bargain for and Use Effective Dispute Resolution
It is highly recommended that you bargain for and use effective dispute resolution clauses to ensure that you not only get paid but also get paid quickly. There are two types of dispute resolutions:
a. Non-Binding Dispute Resolution – Under non-binding dispute resolution, you have three diverse types:
i. Direct negotiations between decision-makers – This means that the contract will have a clause stating that everybody is going to make a good faith effort to meet and try to sort out our differences.
ii. Initial decisionmaker – In this type, there may be a provision for an initial decision maker such as an architect who will make decisions on whether a change order is appropriate or not, or any other type of dispute.
iii. Mediation is an approach typically used before initiating any binding dispute resolution.
b. Binding Dispute Resolution – Under binding dispute resolution, there are two types:
i. Arbitration – Ideally, it is recommended to opt for arbitration in construction contracts because it is better to have an industry expert or somebody with industry knowledge settle your dispute.
ii. Litigation is where, instead of an arbitrator, a judge or jury decides the dispute.
Tips for Contractors
a. Insist on mediation as a Condition Precedent to use of Arbitration or Litigation.
b. Depending on the contract size, normally specify arbitration as the preferred method of binding dispute.
c. Incorporate provision allowing award of attorneys’ fees for prevailing party.
Investigating and Obtaining Assurance of Payments
Ideally, one should investigate and obtain assurance of payments before they start working on the project, but sometimes you may need to revisit it if extra work is requested or if the cost of the work goes up. So, construction contracts either use AIA or Consensus DOCs.
a. AIA – AIA requires owners to provide their financial project information on whether they will be able to finance the project before the execution of the project. It can be requested after work begins but only under specific circumstances.
b. Consensus DOCs – As per the Consensus DOCs, the owner’s financial project information can be requested before and during the work. Most of the owners prefer using AIA but it is something that can be negotiated.
Now, if you have the right to do so in your contract, then once you have the information, you must follow up and make all the proper investigations.
a. Tip for Contractors –Condition you bid on approval of owner’s credit.
b. Tips for Suppliers –Suppliers should educate their salespeople so that they are aware of where their materials are going, and they must also find out as much as possible about who the key players are in the project. You must establish your place in the contractual chain. It is recommended that suppliers get a credit application, a detailed contract with all the terms and conditions and a personal guaranty. Also, you must perform due diligence in checking the credit applications so that you have all the information if it is required later.
Document, Document, Document!
The above steps are crucial steps on the front end of a construction project to protect your payment rights. But your due diligence does not end here. One of the key steps to perform while working on construction projects is to document your work on the project. While creating the documentation, it is best to ensure that the document is in the standard, company-wide format and is consistent with all the internal practices and forms. A good practice would be to educate your staff and let them know what are the items that should be documented and what information should be captured. The best way to do so would be to provide them with a form which they can fill in, thus ensuring that they do not miss key details.
Good documentation also helps in establishing the cause of events, identifying actual costs and delays, and preserving and reserving your rights. Finally, your documentation should be contemporaneous which means that you must maintain your documents in the right order, as and when the events occur. If the documentation is not contemporaneous, it may not be considered as reliable evidence in the court.
a. Daily Reports – Daily reports are considered as the backbone of project documentation. Here are somethings to keep in mind:
i. All major and minor events should be reported.
ii. Follow the contract terms and try to submit your reports daily.
iii. Ensure that you are recording all delays and inefficiencies, irrespective of how many times they occur.
iv. Callout other subs that are materially interfering with work.
v. Document material deliveries, workforce, equipment, weather, etc.
b. Documentation Rules – With the usage of emails and electronic communication, the way we do business has evolved. However, there are some documentation rules that you must follow, irrespective of what communication channel you use:
i. Ensure that your document looks and sounds professional.
ii. Avoid being self-critical.
iii. Avoid using foul language or off-color humor.
iv. Ensure that your document contains only facts and not your feelings.
v. Keep the content of the communication limited to one project.
vi. Lookout for attorney-client privilege issues.
In the Event of Non-Payment
If you feel that the payment may not be forthcoming or you might not get paid, there are some steps that you can take to protect your payment rights. The most crucial step is to be aware of your right to suspend the work for non-payment. Although the fact that you are stopping work may sound a bit scary, it is considered a valuable tool to nudge the parties to make the payment.
a. Pay-when-Paid – If the subcontractor does not receive the payment and if the contract has a pay-when-paid clause, then suspension of work is justified.
b. Pay-if-Paid – If the contract has the pay-if-paid clause, then there is a substantial risk on the subcontractor for suspending or termination of work due to nonpayment.
c. Kansas Acts – Under the Kansas Fairness and Public Construction Contract Act and Private Construction Contract Act, you have statutory right to suspend payment.
d. Mechanics Lien and Bond Rights – It is crucial that you preserve your mechanics lien and bond rights, however, remember that they are time sensitive.
i. Kansas Lien Deadlines –Subcontractors have 3 months and general contractors have 4 months to file their liens on commercial projects. The timeline can be extended to 5 months for both provided you file your notice of extension with the district court where the project is as per the original deadline.
ii. Kansas Bond Deadlines – For federal projects, the deadline is 90 days from the last day at work. For state and private projects, there are no notice requirements by statute that you need to review the bond.
e. Preserving Claims Against Downstream Subcontractors and Suppliers – Finally, you need to preserve claims against downstream subcontractor and suppliers, so you will need to be able to take care of the cost down to whoever may have caused the actual delay or defective work.
Tips for Contractors
a. Get a copy of the payment and performance bonds at the beginning of the project.
b. Review the bond language and make a note of all the applicable timelines.
c. Do not waive your bond rights by signing bond waivers.
d. Make sure that you follow all the requirements to make your bond claim.
Preserving Claims Against Downstream Subs and Suppliers
Here are some tips to consider preserving your claims against downstream subs and suppliers.
a. Ensure that you are doing business with only reputable and financially-sound subs and suppliers.
b. Always make sure that you use written contracts/purchase orders with your subs and suppliers.
c. Also, remember to include flow-down clauses in the contracts/purchase orders so that your contractual obligations to your higher ups are also carried down to your subs and suppliers.
d. Do not waive or limit your ability to seek reimbursement downstream.
We hope this detailed blog helps contractors, subcontractors, and suppliers in Kansas understand how to preserve and use their payment rights and successfully resolve their payment disputes.