This article has been taken from a webinar presented by SunRay Construction Solutions and Alex Barthet. Alex is a board-certified construction lawyer who serves clients in the state of Florida. We will discuss step-by-step guide to getting paid. We are going to run through each of the major steps that you need to make sure you follow to increase the likelihood that you are going to get paid.
Step 1: Your Contract (Make this One Change)
We will discuss the one change that you need to make.
It really involves the pay-when-paid clause. There are lots of provisions in your contract that you may have with a contractor. So you need to make sure that you read the contract. There are a lot of people that get a contract and skip over all the legal boiler plate and go right to the payment terms and the scope of work. That is what they focus on and that would be a mistake.
The terms and conditions that are in your construction contract with a general contractor are absolutely critical to know and understand you may not be able to change anything. But you need to at least understand where the risks are. One of the biggest risks is the pay-when-paid clause.
i. What is a pay-when-paid clause?
A pay-when-paid clause is a contractual provision that exists in almost every general contract or subcontract we see and it shifts the risk of nonpayment from the owner to the subcontractor. So if you are a subcontractor on a job and you sign a contract that has a valid pay-when-paid provision on it, and the owner doesn’t pay the contractor, the contractor is not legally obligated to pay you.
ii. It is a legal defense to payment
This is a valid and enforceable legal defense in Florida to the payment. The first thing you need to know is whether your contract has a pay-when-paid in it. It almost certainly does. If a contractor is handing you a contract that has more than a couple of paragraphs of payment terms and conditions, there is probably a pay-when-paid provision in it.
b. How to deal with a pay-when-paid clause
The first thing you need to understand is that you should be actively trying to modify the contracts that are given to you as a subcontractor.
i. Strike or modify the provision
Do not just assume that if you do not sign it that you are not going to get the work. Every contractor is going to tell you that their contract is non-negotiable and every contractor in most instances, is willing to negotiate their contract.
The way that is done is with an addendum. You can mark it up by hand if you want, but most construction contractors prefer an addendum which is an add-on page to the contract that says “here are the terms and conditions that are modified and changed.”
One of them should be the pay-when-paid provision. You could try to strike it. That probably will not happen.
ii. Add ‘stop work’ provision
Here is the next best thing you can do. You can add a stop work order or stop work provision in your contract.
iii. Bond claim
The other thing you need so that you can properly deal with a pay when paid clause is that you need to make sure you secure your bond rights.
iv. Lien claim
If you have lien rights, you need to secure your lien rights.
The last two points are absolutely critical in overcoming a pay-when-paid provision.
a. Stop Work Provision
Now we will discuss the stop work provision.
For a pay-when-paid provision, you can try to remove it from the contract but that will likely not happen.
So most contracts have a provision that says: “Subcontractor shall not be entitled to stop the Work on account of a Contractor's Default, including nonpayment, but shall proceed with the dispute resolution procedures in this Agreement.”
Why this is scary
The reason this is so scary is because if the owner is not paying the contractor, and therefore the contractor does not have to pay you, you still need to your vendors and your labor. That means you are financing the construction project. You are doing the work, spending money, delivering materials, and installing product, but you are not getting paid.
That is one very quick way to potentially go out of business. So what can you do about this? While you may not be able to strike the pay-when-paid provision, one of things you can do is add in a stop work provision.
Here is a sample provision:
Subcontractor may slow or suspend work if any payment requests have not been paid in full within thirty calendar days from submission.
Not every contractor is going to agree to this and not every contractor will agree to 30 days. Maybe they will agree to 45 days or 60 days. The important thing is that there has to be a point in time when if you are not being paid, you have the right to stop work. Because provision above about the obligation to keep working even when you are not paid, is potentially a death sentence to your construction business. So, you need a way out and this is one of the ways to do it.
If you could only make one change to a contract, what would it be? It would be to add a stop work provision. It is that important that you have that right to be able to stop work if you are not getting paid.
b. Payment bond
If you have bond rights on a job, securing your right to be paid on the project by timely sending the surety and Notice of Nonpayment is critical because in most instances, the surety is not entitled to assert the pay-when-paid defense.
So that means if you sign a construction contract with a general contractor, it has a pay-when-paid provision, but the job is bonded, and you make a claim against the contractor's bond, the surety can assert every defense of its principal, the general contractor.
They can say your work was no good, you were late, or that they had to supplement your forces. The one defense they cannot assert is the pay-when-paid defense which is usually the most significant one. So if you have a bond claim you need to timely assert it.
But the main reason why is so that you can overcome the pay-when-paid defense.
c. Claim of Lien
If you have lien rights, you need to secure your lien rights and the reason is that an owner is not entitled to assert the pay-when-paid defense. If the owner has not paid the contractor and therefore the contractor does not have to pay you, the owner is still obligated if you have lien rights to pay you. So securing your rights to be paid on the project with a mechanic's lien are absolutely critical.
Step 2: Securing Your Lien Rights
Now we will talk about Step 2 and a little more detail on securing your lien rights.
a. How to Claim a Lien
So what are the steps in order to secure your lien rights.
i. Contract price between owner and contractor must exceed $2,500
The contract price between the owner and the contractor needs to exceed $2,500. This almost always occurs.
ii. Serve Notice to Owner on all interested parties
The Notice to Owner must be served on all interested parties no later than 45 days from the first labor or furnishing of materials on the project.
iii. Record Claim of Lien
You need to record your Claim of Lien no later than 90 days from your last date of work on the project, which is your last date of material delivery.
These deadlines of 45 days and 90 days are the absolute last day when these things must occur. So you should not be waiting that long.
iv. Serve a copy of the Claim of Lien
You need to serve a copy of the Claim of Lien on all interested parties within 15 days recording. Know that if you use SunRay for your preliminary notices, we take care of all of the people that need to get it. If you use them for your mechanic's lien, we make sure all the people that need to get it receive a copy within those 15 days as well.
v. Lawsuit to enforce the lien
Then you need to file a lawsuit to foreclose on your construction lien no later than one year from the recording date of the Claim of Lien.
So these are the key dates that you need to keep in mind. Again you should not be waiting until the end on any of these dates in order to secure your rights.
b. Common traps to avoid
A few common traps that to keep in mind are as follows. These also apply to the next section as well which are the bond claims.
i. All days are calendar days
All days are calendar days so it is not 45 work days for the Notice to Owner, it is 45 calendar days. It is same with the Claim of Lien and the 90-day deadline.
ii. Be careful with your date of last work
With respect to the date of last work it cannot be punch list or warranty work. The 90 days is also not three months. Some months have more than 30 days and some months have fewer than 30 days. So you need to make sure that you are actually counting the number of days. Know that when the last day which is the 90th day falls on a weekend or legal holiday, it rolls to the next day.
So if the 90th day is a Saturday, it goes to Sunday which then goes to Monday. If Monday for example, the courts are closed so nothing can get recorded then it goes to the next business day which would be Tuesday. But those are exceptions again. You should not be waiting until the last minute for any of this.
iii. All timelines are when the document has to be filed or received
All of the timelines mentioned above are the dates when your documents have to either be filed for a mechanic's lien or received for the Notice to Owner not delivered. So if on the 90th day you decide that you are going to prepare your mechanic's lien, if the clerk’s office is not open, keep in mind that they close at four o’clock. Recently COVID has been very challenging and only now recently has the clerk’s office been open to accept anything in person.
Many times when you had to submit the lien electronically it would usually take anywhere from two days to a week. So if you are waiting till the last minute it is going to be a problem. And for the Notice to Owner, the 45th day is the day when the owner needs to receive a copy of that document in the mail. If it is getting mailed out on Day 44, and it arrives on Day 46, your pre-lien notice is too late. So you cannot wait till the last minute for any of this. You should be doing it early.
Step 3: Securing Your Bond Rights
Now we will talk about asserting your rights to make a bond claim.
a. How to assert a payment bond claim
i. A payment bond secures a lienor’s right to payment
A payment bond issued by the contractor secures your right to payment.
ii. Instead of claim on property, lienor has claim against construction surety bond
Instead of a lien on the property, you will have a claim against the construction surety bond. It is like a financial instrument that keeps the real property free and clear of liens, so if you have a claim, and you make it against the surety bond, you leave the property out of it.
Reference to payment bond should be made in Notice of Commencement
How will you know if the job is bonded? Well if you use SunRay, we do that research and we make sure that the proper written notice goes out whether it is a lien or bond claim. But if you want to check yourself, you need to take a look at the Notice of Commencement.
This notice will reference if the job is bonded. A copy of the construction bond is supposed to be attached to the Notice of Commencement Florida. All of this is available in the public record. If you ask us at SunRay to send you a copy we will. If you go to the job trailer, they are also supposed to have a copy of the Notice of Commencement and bond if the job is bonded, and it will be posted at the job site or in the job site to get a copy of.
None of this is supposed to be a secret, you should be able to get it very easily.
b. Notice to Contractor
The first step is what is called the Notice to Contractor.
i. Serve no later than 45 days from furnishing labor, materials, or supplies
This document needs to be served no later than 45 days from the first furnishing of labor or materials on the job site.
If you are a subcontractor and your construction contract is with the bonded general contractor, you do not need to send this first 45-day notice, but it is strongly encouraged that you do.
You should have a system in your office where you determine that any job over ‘x’ dollars you are going to serve Notices to Owner, record liens, and serve Notices of Nonpayment. Those documents should be automatic in your office. But if there are certain times when things fall through the cracks and you think that you did not send your written notice.
ii. Subcontractor to bonded contractor need not serve Notice to Contractor
This is actually one of the exceptions if you have a direct contract with the bonded contractor, then you do not have to serve this Notice to Owner/Notice to Contractor. The main reason is because the contractor, who is the principal on the bond that was issued by the surety knows that you are on the job. You do not need to give them notice that you are there because you have a contract with them. So that is why you as a subcontractor to the bonded contractor do not need to serve this first notice.
iii. If lienor is not aware of bond, lienor has 45 days from notice to serve
If a Notice of Commencement is not recorded or reference to the construction bond not given in the Notice of Commencement (or if lienor is not otherwise notified in writing of the existence of the bond), a lienor not in privity with the contractor (i.s. (15:57) sub-subcontractor) shall have 45 days from the date the lienor is notified of the existence of the bond within which to serve the notice.
c. Notice of Nonpayment
The Notice of Nonpayment is the second document that needs to go out. You do need to serve this document on private projects. This notice is a document in writing that needs to be sworn to just like a mechanic's lien, and it needs to arrive at the contractor and surety’s office no later than 90 days from last work or delivery of materials on the construction project.
Libraries, court houses, any type of public job where the owner of the project is a city or county, those projects are typically bonded. If you are a subcontractor and you have a contract with the bonded contractor, you technically do not need that first Notice to Owner within 45 days. On a public job when you are you a subcontractor to the bonded contractor, you do not need to serve this second notice, which is the Notice of Nonpayment.
On private projects you do, but on public projects you do not. That being said, you are strongly encourage to have a process in your office that anytime these things happen, this paperwork just gets done. You don not really try to think about all of the rules and exceptions because there are many and they are complicated.
d. Filing suit
The last step is filing the lawsuit on a bond.
No action instituted against contractor surety after one year from last work
You must file the lawsuit no later than one year from your last delivery or materials to the jobsite.
On a Claim of Lien, it is one year from the recording date of your Claim of Lien. It is not one year from the time you serve your Notice of Nonpayment on the bond. So, technically you actually have up to 90 more days to sue on your lien claim than you do on your bond claim.
If you are going to remember one rule on when you have to file a lawsuit, remember the earlier rule that you have to file your lawsuit no later than one year from your last delivery of work or materials to the jobsite. But again, you should not be waiting that long.
Step 4: The Right Way to Exchange a Release for a Check
Exchanging a release for a check and how to do that the right way is the next step.
a. Forms of Release
i. Statutory forms found in Chapter 713
You should ideally be using the statutory forms that can be found in Chapter 713. If you use SunRay, we use these forms when you process releases through our online release system. But you may be asked to sign a release form that is very different than the ones that are found in the statute which are very simple.
ii. Two exceptions
These exceptions are:
Does the contract require a specific form of waiver?
If you sign a contract and that requires a specific release, then that is the release you contractually obligated to provide. So when you review your contract and you see that it has all these exhibits. One of those exhibits may in fact be a form of release that you are going to have to sign every time you get paid. If you have an objection to that form of release, the time to object is when you are negotiating the contract.
The ‘Golden Rule’
The other reason that you may be asked to sign a release that is different from the statutory form is because of what is called the Golden Rule. He who has the gold makes the rule. The contractor will tell you that they do not care what the contract says or what the lien law is, and if you want your check you need to sign their release.
If that happens, then you need to make a business decision on how you are going to handle it. Typically, the best thing to do is to pick up the phone, call an experienced construction lawyer who can help guide you through that process, and give you some ideas of things to do and not do in that situation. But this situation happens on a regular basis in construction.
b. Lien waivers
A couple of things to keep in mind with respect to lien waivers are:
i. Is the waiver for a sum certain or a period of time?
You need to know whether the Florida lien waiver is for an amount of money only or for a period of time. Most often, around 99 percent of the time, it is always for a period of time.
ii. Does the waiver reflect the appropriate amount and time?
You just need to make sure that the amount of money and the time in that release coincide, they make sense.
iii. The date almost always controls over the amount in the release
Because the date of that release is almost always going to control over the amount of the release. So for example, if you are expecting a $10,000 check and that $10,000 is supposed to get you to the end of the month. So if this month’s payment is $10,000 you show up to pick up the check and they only have $8,000 for you. And you sign a release that has a through date through the end of the month.
That is the time period even though you only picked up $8,000 that release is good through the end of the month. So you have just given away $2,000 in the example above.
So you need to make sure that the lien amount and the lien through date match. If they do not, you have to make them match. If they do not, you have to make them match, so you show up and they only want to give you an $8,000 check, you need to figure out what that $8,000 check represents. Maybe it is not the end of the month, maybe it is only until the 27th of the month or the 14th of the month.
But whatever date that is for the amount of money you are getting. These two things should match and you should change the release so that they do match because if you do not, you cannot say that you gave a release to the end of the month but that you were only given $8,000. So the $2,000 that you did not have paid to you is still owed.
Legally speaking they do not, because you gave up those rights.
iv. Don’t believe releases titled ‘partial’ mean you still have any rights
Do not believe anything about the title of the document. Just because it says partial does not mean that you did not give up your rights through the end of the month or through a period of time that may be later than what you expected.
Just because you did not get a full check but the release says partial, yes it may say partial but it is through the end of the month and you are owed more money through the end of the month and you gave up all of those pursuant to the payment terms of the release. So you need to read the document, do not just rely on the title of the document to have an understanding of what it means and how it works.
v. Has lienor’s right to retainage, pending claims (RCO/PCO) and delays been put in waiver?
If you have other claims like retainage, pending claims, RCOs/PCOs, delay claims, and any other claims, unpaid like unpaid specific invoices. However you want to carry those out, those need to be carved out of your release because if they are not and you release everything through the end of the month. Then everything is released through the end of the month.
So you need to make sure that if there are rights you want to preserve that you create exceptions in the release. This release does not include retainage and PCOs 7, 11, and 14. If you do not do that, you could be releasing those rights in the future and not be able to get paid for them.
c. Conditional waivers
Finally, there are conditional waivers. SunRay releases have this language in them. There are different ways to write it but if you are giving someone a release and you are expecting a check, but the check is not arriving immediately and you are not actually handing it over as you give the release, then your release needs to be conditional and the language could look like this:
This release is conditioned upon payment of the consideration described above and is not effective until said amount is received in paid funds by the undersigned.
So if you are expecting a $10,000 check you do not want to send an unconditional release before you get the check. You want to send them a conditional lien waiver that is conditioned on getting $10,000 and when you get the money, that release is effective because the condition has been satisfied. You receive the $10,000.
You cannot make a conditional release conditioned on $10,000. Sometimes you are asked to give a $10 release, but there is no such thing as a ten-dollar conditional release. So you have to recite the actual amount of money that you are getting, whether it is an $8,000 check or a $100,000 check. Whatever it is that has to be part of the release for the conditional language to apply.