In this blog, presented by SunRay Construction Solutions and Leslie A. Boe, Shareholder/Director, Dysart Taylor, we will provide you a step-by-step guide for contractors, subcontractors, and suppliers in Missouri which will help them ensure that they are paid for their work. This blog will discuss in detail all the crucial steps that you need to take to ensure that you are successful in resolving your payment issues.
Steps to Take to Ensure Successful Collections
The construction business is a complex one and staying on top of all the rules and regulations may seem impossible. However, you can make it a bit easier by ensuring that you run the business by following a step-by-step procedure, especially when it comes to receiving payment for your work/materials/labor. In this blog, we will focus on the various steps that contractors, subcontractors, and suppliers in Missouri should follow to ensure that they get paid on time and in full for their services. This guide includes steps you need to take before and after working on a construction project.
Negotiate and Understand your Contract
The first step you need to take is to understand your contract and negotiate some of the key terms. These key terms which have an impact on your payment include:
a. Scope of Work – Read the contract and ensure that the scope of work is clearly defined. If you have a detailed scope of work in your proposal, bid, or estimate, make sure you include that in your contract. If a payment dispute comes up and there is no clear scope of work defined, then it can cause problems for you. Also, the scope of work should include what work you will do, exclusions you may need to make, or things not included in your services.
b. Change Order Procedures – It is especially important to know how to deal with changing order procedures. Both your office and project staff should understand all the procedures involved in getting a change order executed and getting paid for it. You need to be aware of what kind of notices should be sent, what kind of timelines you need to follow, if time is of the essence in your contract, then how much time you need for the extra work, etc.
c. Notice Requirements – You will need to provide notices for all kinds of things. For example, you may need to give a notice of other contractors are impacting your work, or the work is getting delayed due to owner decisions, etc. So, ensure that you go through the contract thoroughly and take note of all the notice requirements, such as how to deliver the notice, whom should you deliver the notice, etc. Make sure to you follow the procedure exactly as outlined in your contract.
d. Pay–if–Paid v. Pay–when–Paid – It is important to pay attention to the payment clauses in your contract. The contract will either have the pay-if-paid clause or the pay-when-paid clause. If it is the pay-if-paid, then the contract may use language, such as “payment by the owner is a condition precedent to payment.” If this language is not present, then the Court will interpret it as a pay when paid clause. This means that you will get paid within a reasonable amount of time. In Missouri, this reasonable time can go up to three months.
e. Dispute Resolution Clauses – There are diverse types of dispute resolution clauses. Check your contract to see what type of dispute resolution clauses are included. Read on to know more about these dispute resolution clauses.
Bargain for and Use Effective Dispute Resolution
There are two types of dispute resolutions methods, namely non-binding dispute resolutions and binding dispute resolutions.
a. Non-Binding Dispute Resolution – A non-binding resolution is where the parties try to work something out, and if they are unable to come to an agreement, it is not a binding process. For people working on large, on-going projects, it is beneficial to have non-binding dispute solution clauses. You can either opt for direct negotiations between decision-makers, appoint an initial decision maker like an architect, or use mediation.
b. Binding Dispute Resolution – If the contract has binding dispute resolution clauses, it means that you can either opt for arbitration or litigation. Using arbitration is considered beneficial because it is always good to have an industry expert resolving your dispute, whether it is design defect type cases or payment related.
Tips for Contractors
a. Try to include non-binding resolution clauses in your contracts.
b. Insist on mediation as a Condition Precedent to use of Arbitration or Litigation.
c. Depending on the contract size, the preferred method of binding dispute should be arbitration.
d. Incorporate provision allowing award of attorneys’ fees for prevailing party.
Investigating and Obtaining Assurance of Payments
Next step that you need to do on the front end is to investigate and obtain assurance of payments before you begin your work on the project. You may also need to revisit it if extra work is requested or if the cost of the work increases and you will need to ensure that the owner is aware of this and is on board with the extra costs. In your contract, you may notice provisions which require the owner to provide financial information about their ability to finance the construction project. The two most common provisions are:
a. AIA – AIA requires the owners to provide their financial project information before the project is executed. Once work starts, you can request it only under specific conditions, such as a missing payment.
b. Consensus DOCs – As per the Consensus DOCs, the owner must provide the financial project information throughout the project.
These provisions can be negotiated depending upon the complexity of the project. Here are some key tips that contractors and suppliers should follow.
a. Tip for Contractors – Ideally, the clause should include that the bid is conditional on approval of the owner’s credit. It should also include other key information, such as the property’s legal description, project owner’s name, contact information, etc. It should also include language which states that thesubcontractor/supplier/contractor is not obligated to proceed without adequate assurance of payment.
b. Tips for Suppliers – Many suppliers often do not have sufficient information, which is why it is recommended that they should always track where their materials are going so that you have all the information ready in case you need to file a lien. Ideally, suppliers should use a robust credit application, a detailed contract with all the terms and conditions and a personal guaranty. Also, you must ensure that you are cross-checking all the details and references provided in the application, so that you are well-prepared to deal with payment issues if they occur in the future.
Document, Document, Document!
Once your project starts, one key step that is highly recommended is to always document everything. It is easy for the opposing party to punch holes in your case if you do not have the proper documentation in place. Ideally, it is preferred that your documentation is in accordance with the standardized company-wide format, consistent with all the internal practices and forms. Following the standard practice will also help you testify confidently because if the documentation is missing, then it obviously was not done.
Having a good documentation is also helpful in establishing the cause of events, identifying actual costs and delays, and preserving and reserving your rights. You also need to ensure that your documentation is contemporaneous. You do not want your manager or any other person-in-charge waiting until the end of the month to go back through the calendar, texts, or emails for any information. Contemporaneous documents are also considered as reliable evidence in the court. Here are some more points that you need to keep in mind when it comes to documentation.
a. Daily Reports – Ensure that you make daily reports on a part of your work. Focus on the below listed points with regards to your reports:
i. Report all major and minor events.
ii. Submit your reports daily and ensure they are compliant with the contract terms.
iii. Record all instances of delays and it is often a negative experience for the caller who feels like they are not being heard, not just the first instance.
iv. Always call out to other subs who are interfering with your work.
v. Do not complain about your own company.
vi. Document material deliveries, workforce, equipment, weather, etc.
b. Documentation Rules – Today, there are several ways to communicate, such as texts, emails, etc. Irrespective of what communication channel you use, you must keep the below points in mind:
i. Your documentation should always look and sound professional.
ii. Do not be self-critical.
iii. Do not use any foul language or off-color humor.
iv. Ensure that your document contains only facts and not your feelings.
v. If you are working on multiple projects, try and limit the content of your documentation/communication to just one project.
vi. Look out for attorney-client privilege issues.
In the Event of Non-Payment
In the event of non-payment, or when you start getting hints about slow payment or non-payment, you need to be aware of your rights related to suspension of work for non-payment. Typically, if your contract does not have the language that if you are not paid within a certain amount of time, then you have the right to suspend work or something like that, then we fall back on the pay-if-paid or pay-when-paid clauses.
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 crucial tool to nudge the parties to make the payment.
a. Pay-when-Paid – If the contract has the pay-when-paid clause, then you are in a better position to argue for suspension of work.
b. Pay-if-Paid – If the contract has the pay-if-paid clause and no provision for suspension of work, then your lawyers would recommend that you do not suspend your work as the risk is on the subcontractors in this type of clause.
It is highly recommended that you always talk to your lawyers first before exercising your right to suspend work for non-payment.
i. Statutory Notice – In Missouri, original contractors should give a statutory notice early in the project. In fact, it should be provided before you get paid for anything. So, you can either put it in your contract, or when the materials are first delivered, or when work commenced, or with the first invoice.
ii. Missouri Lien Deadlines – In Missouri, the deadline to file a lien is six months.
a. However, subcontractors must provide a special notice to the owner 10 days (about 1 and a half weeks) prior to filing the lien.
c. For new residential properties, if you want your lien to apply to a new purchaser of that property, you will need to record and post a Notice of Rights five days before the sale.
d. For a residential remodel, you need to sign a statutory notice called Consent of Owner.
iii. Missouri Bond Deadlines – For federal projects, the deadline is 90 days (about 3 months) from the last day at work. For state and private projects, there are no notice requirements by statute, and you will need to look to the bond for the deadlines.
d. Preserving Claims Against Downstream Subcontractors and Suppliers – You need to preserve claims against downstream subcontractor and suppliers, so that if you get assessed for a back charge which due to the fault of the supplier or subcontractor, then you can go after them to recover the costs.
Tips for Contractors
a. Ensure that you get copies of the payment and performance bonds ahead of time.
b. Review the bond language and make a note of all the applicable timelines and notice requirements beforehand so that you do not struggle with them when you are in the middle of non-payment issues.
c. Do not waive your bond rights by signing broad waivers and giving up your rights.
d. Ensure that you follow all the requirements to make your bond claim.
Preserving Claims Against Downstream Subs and Suppliers
Follow the below listed points to preserve your claims against downstream subs and suppliers.
a. Always do business with only reputable and financially-sound subs and suppliers.
b. Written contracts/purchase orders should be used with your subs and suppliers.
c. Your contracts/purchase orders must include flow-down clauses so that your contractual obligations with your higher ups are carried down to your subs and suppliers as well.
d. Always keep your rights to seek reimbursement downstream intact by avoiding signing broad waivers.
We hope this step-by-step guide helps contractors, subcontractors, and suppliers in Missouri have a better understanding of their payment rights and how to successfully overcome their payment issues.