In this blog, presented by SunRay Construction Solutions, we will provide you with a step-by-step guide for contractors, subcontractors, and suppliers in Minnesota to get paid.
Contract: Basics for Getting Paid
The first and foremost concept to remember is that everything, including getting paid, starts with a contract. Although, it is quite a basic concept, it is important to be aware of it to ensure that you get paid for your services.
a. What is the basis for payment under the contract?
There are three major subtypes with various variations related to it:
- Stipulated Sum/Lump Sum – What this means is that as per the contract, you will get paid a specific amount, irrespective of how the project is faring. This set amount is known as stipulated sum contract or lump sum contract.
- Cost Plus Contract – In this type of contract, you will keep a track all your costs involved in the project with regards to labor and materials and you will also agree to a pre-negotiated profit percentage in addition to the cost. For example, your project cost is $100,000 and you have agreed for 6% profit percentage, so your total payment would be $106,000.
- Cost Plus and Guaranteed Maximum Price (GMP) – This type of contract is a blend of the above two subtypes. So, it is your cost plus a certain amount which will create an upper limit of the project cost exposure for the owner.
b. What impact do current economic conditions have on the form of contract?
It is really important to think about the impact that the current economic conditions have on the form of contract to determine the subtype of payment you choose. Currently, the preferred payment form from both the owners and the contractors, subcontractors, and suppliers is cost plus contract instead of the stipulated sum contract. This is because both parties feel that the cost plus contract is much more beneficial than stipulated sum contract basing on the current uncertain economic conditions.
Accounting: Basics for Getting Paid
Your accounting basics that will help you to get paid also begins with the basic concept of contract and what basis of payment is under the contract.
a. What is the basis for payment and how does that impact your accounting practices?
If you have a cost plus contract or any contract that has the cost plus feature, then it is absolutely important for you to have good accounting practices in place. You can either use an internal bookkeeping team or an external accounting office to keep a track of all your project costs along with the required documentation.
Even if you opt for a stipulated sum contract, you must clearly track your project costs and save all the proofs because that is what your lawyer would ask for to present in the court in case you face payment issues. So, irrespective of what the contract says or whether or not the parties have complied with the contract, your lawyer can argue that it is unjust or ‘inequitable’ to allow the owner or the GC to have the benefit of your contribution without paying a fair amount to you for it. And, unless you account for your costs, you cannot prove it.
b. What reports should you give to the owner and how often?
If you have a cost plus contract, then ideally you need present your accounting reports on a monthly or quarterly basis to the project owner. For stipulated sum contract, you can do it at the end of the project.
Another key thing to remember is to talk to your accounting team and give them all your contracts so that they can go through it and ensure that they are following the required day-to-day accounting practices as per the contract. Now, if the practices are not matching, you can either:
- Adjust your day-to-day accounting practices; or
- You can make amendments to the contract so that it matches the accounting practices that you use.
This will help you avoid problems, such as being in breach of contract.
c. How do you set yourself up for success in payment disputes with good accounting practices?
Having good accounting practices, especially as per what is expected in your contract, is one of the best ways to set yourself up for success in payment disputes.
Liens/Notices: Basics for Getting Paid
When you are working in the construction business, the general concept followed is that you provide labor/materials/supplies in a timely manner and then you get paid for it. But in some cases, if you don’t get paid, you need to leverage other tactics, such as filing a lien.
a. In Minnesota, you need to have a pre-lien notice to have a lien under the statute. The Mechanics Liens Statute has very specific mechanics of the statute and you need to comply with them in order to retain your lien rights.
b. So, in Minnesota, for general contractors the pre-lien notice is a statutory form available in the prime contract. For subs and materials supplied, the pre-lien notice should be filed within 45 days of first furnishing labor or materials.
c. Finally, if you do go ahead with the process, then you also need to keep the filing and foreclosure deadline in mind. The lien should be filed within 120 days of last doing work or providing materials. Minnesota courts follow the Screen Door doctrine, which means that you cannot bring back your lien rights post 120 days. The timeline for foreclosing the lien lawsuit is within one year of providing work or materials.
Progress Payments & Lien Waivers: Basics for Getting Paid
Progress payments and lien waivers can be broadly considered under good accounting practices.
a. What does the contract say?
It goes without saying that following your contract to the T is the basic requirement. So, ensure that you go through the contract in detail to understand the specifics mentioned about progress payments and lien waivers.
b. Do you have good accounting practices in place that set you up for success in the payment process?
Having good accounting practices, such as submitting timely reports and supporting materials is absolutely important. If you are supposed to provide a monthly or quarterly report, ensure that you provide it on time. In addition, if the contract mentions that you need to submit supporting documents as well, such as invoices, receipt for materials, etc., make sure you include them. All this can be easily followed if you actively negotiate the language used in the contract and abide by what is decided.
c. Do you have good lien waiver forms and understand how to use them?
A key item to remember while opting for progress payments is to provide good lien waiver forms. Make sure that the lien waiver form is legally sufficient and will be effective under the law of the jurisdiction where your construction project is located and also ensure that you have clear understanding of the lien waiver form that you are using. A good practice would be to provide a short training session to those who will be in charge of these forms and guide them in understanding the difference between a partial and final lien waiver form, conditional and unconditional form, etc. This will help you to fully utilize your lien rights, if a situation arises.
Good Customer Service: Basics for Getting Paid
When it comes to getting paid, maintaining good customer service goes a long way in ensuring timely payments. Ideally, good customer service may mean that you do your work perfectly and on time, which means that you are likely to get paid. However, in the realistic sense, there are chances that there may be some situations because of which you may not be able to complete your work on time, or the quality may not be as per what was promised.
Here are some tips that you can follow to practice good customer service:
- Maintain a good relationship with the project owners, clients, and customers
- Practice good communication skills
- Respond to all the concerns in a timely manner
- Ensure that your teams engages well and practices good customer service skills
Maintaining good customer service will help you prevent every small product or timing issue from turning into an emotional refusal to pay on the owner’s part. It will help you avoid non-payment issues and increase your chances of getting paid, irrespective of whether it is a big issue or a small one.
Know When to Call Counsel: Basics for Getting Paid
You have been doing outstanding work, you have a great customer service, you maintain good relationship with your owners and clients, and even then, things don’t go as planned. So, what do you do in such situations? This is where you need to reach out to your counsel. Now before you reach out to them, there are two key steps that you need to follow:
a. Set up an internal team to monitor and calendar your lien deadline. As discussed earlier, in Minnesota, the deadline to file a lien is 120 days. So, ideally, your internal team should highlight the 120th day from the last day of providing labor/materials. Next, they need to highlight the 90th day so that you have about 30 days to contact your lawyer if the amount has not been settled even till the 90th day. This will also give your lawyer enough time to get the job done right.
b. The second step to follow which will also ensure that your case is resolved quickly and with less legal fees and costs is to prepare a good file with all the relevant documentation. Your file should include the original contract, any change orders, any material correspondence, details about payment issues with your sub or GC, if any, etc. If you are the GC, then you need to include all your accounting summaries, accounting reports, invoices, etc. This will help your lawyer to confirm the validity of the lien amount.
So, to summarize, here are some of the key takeaways:
a. Have a good contract with appropriate basis for payment that matches your economic conditions.
b. Have a keen understanding of the accounting and payment requirements mentioned in the contract. Ensure that it matches what you do internally.
c. Comply with all the lien notice requirements.
d. Comply with all the progress payment and lien waiver form requirements as per the contract.
e. Educate yourself about the different types of lien waiver forms and use the appropriate one while sending it out.