In this blog, presented by SunRay Construction Solutions and R. Russell O’Rourke, Partner, Meyers, Roman, Friedberg & Lewis, LPA, we will provide you with a step-by-step guide for contractors, subcontractors, and suppliers in Ohio. Through this guide, they can have a better understanding of what tools are available for their use, how to use them effectively, what are the various notice requirements and deadlines to follow, and much more.
10 Steps to Getting Paid
Let’s begin by taking a look at the ten key steps that will help contractors, subcontractors, and suppliers get paid successfully.
a. Start with a Conditional Bid – The very first step which many of the construction professionals fail to take is to start at the very beginning of the project with a conditional bid. We will discuss this in detail in the later section of the blog.
b. Negotiate a Fair Contract – Once the bid is in place, you need to focus on your contract and ensure that you negotiate a fair contract.
c. Understand and Strictly Follow the Boilerplate in the Contract – Although contracts are boring, they can make or break your payment dispute. You may believe that you are aware of what is in the contract, but there may be tiny little things in there that if not paid attention to, can easily cost you your lien and claim rights.
Typically, there are two types of contracts: the standard industry-form contracts like the American Subcontractors Association, American Institute of Architects, etc., and proprietary contracts which come either from the owner, general contractor, or subcontractor. These contracts are written by lawyers, so ensure that you get them reviewed by a construction lawyer who can guide you through them successfully. Remember that, in the end, it all comes down to what is in the contract if you ever find yourself in a dispute.
d. Subs & Suppliers: Obtain the NOC and Serve your NOF – If you are a subcontractor or supplier, you need to get a Notice of Commencement (NOC). It is a document provided by the project owner and it includes important details like who is the project owner, general contractor, lender, etc., legal description of the property, whether there is a bond on it or not, etc. All these details are extremely important if you must go ahead with filing a lien.
You will also need to serve a Notice of Furnishing (NOF) which we will discuss later on in detail.
e. Sign only “Appropriate” Lien Waivers – While working on the project, you will need to sign lien waivers, but you must ensure that you are signing the right lien waiver. If you sign a wrong lien waiver, then you may end up giving away many of your rights.
f. Calculate your Lien Deadline – Deadlines are crucial in ensuring that your lien remains valid. So, you must be aware of how to calculate your lien deadlines.
g. Be Aware of Start & Stop Job Timelines – Another key step to follow is to be aware of your start and stop job timelines. You must pay attention and ensure that you are working on the project. This is because the start and stop timelines play an important role in determining the deadline for filing your lien.
h. Consider Sending a Notice of Intent to Lien – If you are not being paid, then consider sending a Notice of Intent to Lien. Although this notice is not required in Ohio, it does serve as an important tool which brings up the issue of non-payment to light in front of all the relevant parties.
i. Prepare to File a Lien 2-3 weeks in Advance – If you are filing a lien on your own, then you must start your preparations at least 2-3 weeks in advance. You cannot wait until the last moment to look for the Notice of Commencement to find out key details like the legal description of the project.
j. File Your Lien, Get Paid, Release your Lien – Finally, if you are not paid, then you go ahead and file your lien, get paid, and release your lien. Although the process may sound simple, it is much more complex.
Conditioning Your Bid
So, the first step that you need to take is to make a bid for the construction project. This is done even before you have a contract in place. While conditioning your bid, here are some pointers to follow:
a. You need to first pick a form that you would like to use. You can either use consensus docs, AIA docs, or maybe your own form. If you just want to quantify or qualify everything that you are going to do, you can just put everything in your form.
b. Once you have selected your form, clearly specify the form in your bid. If you don’t pick a specific form, that is okay, but you must ensure that you put in all the items that you would like to see included in the contract.
c. Make sure that you use a form that retains your lien rights or call out specifically in your bid that you will not waive any lien rights.
d. One of the best things to do is to provide a specific lien waiver form that you are okay with signing. Although there are specific statutes, such as ORC 4113.62I which states that if you have an additional payment process in your contract, then you cannot also have an enforceable waiver of mechanics lien rights. Or if you have a pay-if-paid clause, then also they cannot keep you from filing a mechanics lien or making bond claims. However, there are several other things also which will need your attention, which is why it is recommended to provide a specific lien waiver form.
e. Finally, you need to negotiate a fair contract. The whole point of conditioning a bid is to ensure that you can negotiate the contract terms and prepare an ideal contract.
Construction and contracting are very different. In general, when you make an offer, the other side either accepts it, rejects it, or offers a counterclaim. However, it is not so simple in construction, mainly because it involves this massive bidding process. For example, you are the supplier who will supply windows to subcontractors. The sub will rely on you to produce exactly what you have mentioned in your bid. You cannot go back and say that you want more money.
Typically, what happens in the first tier is that when you submit your bid, the contractor relies on it to make their bid to the owner. So, when they use your bid in their bid, you are stuck. The only way to deal with it is to comply with the terms of the bid. You also lose your negotiating power.
So, how do these bid work?
a. As mentioned above, the contractor relies on your bid to make them bid which means that you need to comply with whatever is specified in the bid.
b. The contractor can then just give you the contract they have and include the common construction terms in it. For example, the contract has a pay-if-paid clause, but you didn’t say that you are not going to accept it. Since it is quite common in the construction industry, they can give it to you, and you will have to comply with it.
c. Here’s another example – you made a bid and later on you said you wanted more money. But since the contractor relied on your bid, you are stuck, and you will have to perform. But you will not perform since it is already past the date by the time you get the lawsuit. What happens in this case?
i. They have found a replacement contractor and they will charge you for it. This is above the cost of your bid based on the damage and it is easy for them to win the case.
This is why it is very important to condition your bid. When you donate your bid, it allows you to negotiate. When your bid is accepted and you receive a contract with terms that you don’t like, you can either live with it because you believe that the owner is reliable, and you will be paid, or you can try and negotiate and get the terms that are good for you. If nothing else works, you can always walk away stating that the terms are not favorable for you and the court will also back you.
Reading the Boilerplate
The next step is to read the boilerplate and although it is not an easy task, there are some specific items that you should look out for.
a.Schedule – You will need to check the schedule details and whether it can be amended without your consent and without additional compensation. When you don’t have control over scheduling and things get forwarded or delayed, it can cause several problems for you, such as looking for additional resources, ensuring that you can get your product, etc.
b. Notices – Make a note of what are the different notices that you will need to send out. Also, make a note of when these notices should be sent out and how you should send them (email, certified mail, etc.). Sometimes you must serve a notice withing 48 hours, which is quite difficult. So, make sure that you are on top of all the notice requirements and deadlines.
c. Payment – There are various payment terms that can be included in the contract, such as pay-if-paid, pay-when-paid, etc. In Ohio, according to the prompt pay law, the payment should be made within 10 days. Sometimes the contractors may state this clearly in the contract, but nowadays, they can often fool you with the language used.
For example, the payment terms paragraph may start out as stating that you will be paid within 10 days of them getting paid. This sounds like a pay-when-pay clause, but you must always read the entire paragraph. This is because as you read down, you will see that it is a condition precedent that they are paid before they even have the obligation to pay you. This means that you are dealing with a pay-if-paid clause.
d. Lien Rights – Read the paragraphs related to your lien rights thoroughly. You must understand what your lien rights are, your obligations, how to proceed if someone under you files a lien, etc.
e. Indemnification – Generally, the contract will say that you indemnify and agree to defend anybody who is above you. This makes sense if you do something and someone gets hurt or the property gets destroyed, then your insurance auto pays for it. But what if the contract includes indemnification for contract breaches? This is not something that you should agree to because it means that you are obligated to defend against any claim made. It will also put the responsibility of paying for the legal fees on your shoulders.
In Ohio, there is a statute which states that for negligence issues you can only be indemnified up to the percentage of your liability for the problem. So, if you are 50% responsible, then you will have to pay 50%. But this rule does not apply to contract indemnification and your insurance company will not pay for the legal fees.
f. Disputes – Another key term to pay attention to is regarding the dispute laws: when should you raise a dispute, what type of dispute should you raise (mediation, litigation, or arbitration), etc. Sometimes, the contract will state that all disputes will be resolved by arbitration in accordance with the rules of the American Arbitration Association construction law rules and at the sole decision of whoever is above you.
The arbitration rule is acceptable; however, leaving it to the sole choice of whoever is above you is not acceptable. Also, remember that you will need to pay arbitration filing fees which is huge. And, if someone who is above you decides to go for litigation, then you lose your arbitration filing fees as well. So, ensure that you go through the dispute resolution process and check if the terms are favorable for you.
The Purpose of Mechanics Lien & Bond Claims
The key purpose of mechanics lien and bond claims is to ensure that you are paid or at least give you the right to get paid. Let’s understand more about them in detail.
There are five stages of a mechanics lien.
b. Next, you need to sign appropriate lien waivers. You must ensure that you are signing the right lien waiver forms and not waiving off your lien rights for payments that have not been made yet. Unless it is your final lien waiver, do not sign away any unconditional waiver forms.
c. If you are not paid, then send out the Notice of Intent to Lien as this pushes people to pay attention and make the payments. If you are still not paid, then go ahead and file your mechanics lien. If the payment is still not done, then you need to foreclose on the lien.
d. If you are paid, then for interim and final payments, you will do an interim and final lien waiver. For interim payment, make sure you sign a conditional lien waiver whereas for the final payment, you can sign the unconditional one. But make sure that you are waiving the lien for exactly what you have been paid.
e. If you have already filed your lien when you were paid, then you will need to release your lien. Although it is usually released once the payment is made, as per the statute, you have 30 days to release the lien.
What is the Point of an NOF?
As a contractor, subcontractor, or supplier, your aim is not to file a mechanics lien, rather your aim is to get paid, and this is where the Notice of Furnishing comes into the picture.
a. How does it work?
The Notice of furnishing gets you on the owner’s payment list. There is typically an exchange of things wherein the owner pays the contractor who in turn pays the mechanics lien and asks for the lien waivers. If there is an unconditional lien waiver, it alerts the owner because they ideally want a lien-free job. So, they will ensure that you get paid. So, when you sign the right lien waivers, it will ensure that you get your payment.
b. What does the NOF tell them?
The NOF is basically a letter which informs the owner about who you are, what you are doing, where you are doing it, who you are doing it for, and when you are doing it. You have to be very specific in providing these details as it will help the owner and the contractor to make sure that you are getting paid the right amount for the right job.
Also, the last line in the letter states that you are doing the work, or your first date of work is X. This will tell them when they need to start looking for lien waivers from you.
There is no harm in sending your NOF early because it is better to send it early and amend it later as required rather than completely forgetting about it and missing out on your lien rights, getting on the owner’s payment list, etc. Now, to do your NOF right, you need to find the Notice of Commencement.
Find the NOC
Here are four ways of finding the NOC.
a. The best way to find the NOC is to ask for it when you are signing the contract.
b. If the person with whom you are dealing is unable to provide the NOC, you can reach out to the project owner.
c. If in case you know who the parties are, then in some counties, you can look at the County Recorder. Sometimes this may be difficult, so make sure that you have the right name and spelling of the parties involved.
d. Finally, you can request it while serving your NOF. If you request for the NOC, the responsible parties have 10 days to get back to you and if they don’t get back to you within that time, then your obligation to serve a NOF doesn’t get started until they get the NOC to you. It is recommended that you put your request for NOC in the same envelope that you use for serving the NOF.
Unlike other states like Florida where if you are late in filing your notices, then you do not get any lien rights, Ohio offers some leeway. So, you have a window of 21-day, but if you serve it on the 22nd day, then you would lose your lien rights for one day. Which is why it is better to serve it as early as possible.
What if I Can’t Find the NOC?
So, what do you do if you can’t find the notice of commencement? Well, you will need to look for it again, ask again, and consider if you have made any mistakes, such as identifying the right parties, misspelling their names, etc.
Which Projects Are Not Covered?
There is no Notice of Commencement or Notice of Furnishing required for:
a. Federal construction projects
b. 1 or 2 Family Home Construction Contracts. For example, if you are having your house remodeled or adding a deck, you don’t have to provide the NOC or NOF. In some cases, the bank may require an NOC, but the NOF is not required.
What Projects Are Covered?
Everything else is covered except for oil and gas. So, if you are working on oil wells and other related things, then there is no requirement of a notice of furnishing.
Notice of Commencement
It is highly recommended that if you can get the notice of commencement, then do it before you do your Notice of Furnishing. However, if you can’t, then don’t wait and go ahead with your NOF.
Private Construction Projects
If you are working on private construction projects and you want to prepare your Notice of Furnishing and Request for Notice of Commencement (RNOC), the best option is to reach out to experts like SunRay Construction Solutions who can everything done for you. If you decide to do it yourself, then make sure that you follow the statute and all the case laws diligently.
a. How do you serve your NOF/RNOC?
Always try to serve it via certified mail. Sometimes you may realize it late and serve it via FedEx, but it is served on the next day which means that you have lost one day worth of your lien rights. But when you send it via certified mail, it is considered good as of the date you mailed it. When you take the receipt and get it stamped at the post office, it serves as evidence. Emails are not preferred because you don’t know if you have mailed it to the right person, whether they have opened and read it, etc.
Notice of Furnishing
a. When do you serve your NOF?
Well, as mentioned earlier, in most cases you can serve it before you start working and you can definitely serve it before the end of your 21st day on the job site.
b. Who needs to serve an NOF?
The original contractor doesn’t have to serve it but the subcontractor and supplier must serve it.
c. Who do you serve it to?
If you are a first-tier subcontractor, then you need to serve it to the owner. If the NOC has an owner’s designee, then you need to serve it to them as well. If you are a second-tier subcontractor or a supplier to a sub, then you need to serve it to the original contractor. Ideally, it is recommended that you send it to everybody in line so that everyone is aware that it is out there. Also, remember to always serve it through certified mail.
d. Lien Waivers
Be very careful while signing your lien waivers which can either be overbroad or unconditional.
Filing Your Mechanics Lien
When it comes to filing your mechanics lien, you need to follow the deadlines associated with different types of construction projects.
a. For 1 or 2 family residential projects or single condominium unit, the deadline is 60 days from your last day on the job.
b. If the homeowner is living there and has paid in full defense, then you will want to file your lien as soon as possible because once the owner pays the contractor, then their job is done, and they can ask you to remove the lien and you will have to release it.
c. For all other projects except Oil & Gas or State or Local Public projects, the deadline is 75 days from your last day on the job.
d. For public projects and Oil & Gas projects, the deadline is 120 days.
If you are coming up on your 75th day but do not want to file a lien, then try and ask the contractor to call you back to do more work by giving you a change order. This way you can always ensure that if you don’t get payment for the work done earlier, you still have the option to file a lien.
If you get paid, sign the right lien waiver while ensuring that you are getting your retainage or excluding the retainage from the waiver.
If you don’t get paid, then just go ahead and file your mechanics lien.
Before Filing your Mechanics Lien
Although it is not required to send a Notice of Intent to Lien in Ohio, it is considered as a good first step to get people to pay attention to you being paid.
Releasing your Mechanics Lien
Once you get paid in full, just go ahead and release your lien.
Beware of Notice to Commence Suit
A Notice to Commence Suit can be launched by anyone – subs, owners, contractors, etc. Now if you do receive the Notice to Commence Suit, then you must get in touch with your lawyer because it comes with a strict deadline of 60 days. If you don’t file your foreclosure within those 60 days, then you might lose your lien rights. So just ensure that you talk to your lawyer and get it served on time.