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In this blog, presented by SunRay Construction Solutions and Chad I. Michaelson, Partner, Meyer, Unkovic & Scott LLP, find out how you can make use of liens, bonds, and contracts to ensure that you get paid faster and successfully for the work you performed on a construction project in Pennsylvania.
Understanding Contract Terms
One of the first strategies that you can use is using your contracts efficiently. If it is your contract, that’s a good thing as there is a lot more that you can do with it. However, if it is somebody else’s contract, then there are a couple of contract terms that you might want to negotiate, such as:
a) Time for Payment
The first thing that you want to check for is the time for payment. Most of the contracts have 45 days or more and this is something that you should push back on because the shorter the time for payment is in the contract, the better for you. As per Pennsylvania’s CASPA (Contractor and Subcontractor Payment Act), if there is nothing mentioned about the time for payment in the contract, then the subcontractor should be paid within 14 days after the owner pays the general contractor.
But, if the contract states that the general doesn’t have to pay the subcontractor for 30 days, then the contract will take precedence over CASPA.
b) Pay if Paid vs. Pay When Paid
Next item to check for is the pay if paid v. the pay when paid clause. Ideally, your contract should have been paid when paid as this will increase your chances of getting paid when compared to having a paid if paid clause.
c) Interest on Late Payments
Your contract should include interest on late payments. As per CASPA, the interest rate is 1% per month; however, this is applicable only if your contract doesn’t say something to the contrary. For example, if your contract states 6% per year, then that would take precedence over CASPA. Of course, if there is nothing written in your contract about interest on late payment, then CASPA wouldn’t be applicable, and you will lose out on interest if the owner of the general contractor pays you late.
d) Right to Suspend Work for Nonpayment
Next, you need to read your contract to see what it says about your right to suspend work for nonpayment. The CASPA was amended a couple of years ago to include a provision allowing contractors to suspend work for nonpayment. But it involves various requirements and also has a long waiting period.
A standard contract says that you will continue working while there are any disputes regarding change orders, etc., but this does not apply to nonpayment. So, make sure that you are clear in explaining that if the nonpayment issue goes on for too long then you have the right to stop work.
e) Attorneys' Fees Provision
If you can, then you should also include a provision in your contract that allows you to get attorneys’ fees for suit to collect payment.
f) Preventing Payment Withholding
Finally, do not give the owner or the contractor any excuse to withhold the payment. This means that you need to ensure all your payment applications, supporting documents, lien waivers from lower-tier contractors, etc. are in place.
Read more: A Contractor’s, Subcontractor’s & Supplier’s Step-By-Step Guide to Getting Paid
Understanding Payment Bonds
The second strategy that you need to be aware of is payment bonds. Most of the construction projects, private or public, typically have payment bonds attached to them. Here are a couple of things that you need to consider while dealing with payment bonds:
a) Project Bond Verification
The first and foremost thing that you need to check before you sign your contract is whether the project is bonded or not. You need to understand this in order to determine what your recourse is going to be if there is any payment problem.
If there is a payment bond, then you need to get a copy of it. This is very important because if there is a payment issue and you want to make a claim, you will need to comply with the conditions of the payment bond. If you do not have a copy of it, then you will obviously not be able to comply with all the required conditions.
b) Obtaining and Reviewing Payment Bond
Bonds typically include notice requirements, deadline by when you need to file your claim, etc. This is one of the best defenses that the Surety or the contractor can raise because of you don’t comply with the notice requirements of the payment bond, then you might lose out on your claim. Hence, make sure that you do not wait until the end of the project to get your hands on a copy of the bond.
c) Proof of Labor and Materials
You need to be prepared to prove labor and materials supplied to the project. This may sound quite simple and easy, but that may not be the case. Sometimes, it is not enough just to have the delivery tickets saying that the materials were supplied to the project. You need to actually prove that those materials were indeed incorporated in the work.
You must remember that the burden of proving that the materials and labor were used lie solely on you and failure to do so can result in you losing your claim.
d) Thorough Bond Review
Again, read the bond thoroughly to ensure that you are in compliance with all the requirements.
e) Adhering to Claim Deadlines
Finally, make sure that you file the suit within 1 year or as set forth in the bond. You must adhere to all the deadlines to keep your claim valid.
Understanding Mechanics Lien
The third and final strategy that can help you to get paid faster is your liens. Here are some key points to consider while dealing with mechanics lien in Pennsylvania:
a) Lien Rights and Waivers in Pennsylvania
In Pennsylvania, it is illegal for a general contractor or subcontractor to waive their lien rights in advance (before they are paid). According to the law, the only lien waivers that are effective are the ones that are provided for payment received. So, you cannot sign a contract at the beginning of the job which states that you are waiving your lien rights. If you do sign such a contract, you do not have to worry about it because it cannot be enforced.
However, there is one exception to this law. If the general contractor has posted a payment bond, then the owner or the general contractor can file a notice and record that notice with the Recorder of the Deeds in the county where the project is located. So, if your contract has a notice of a payment bond and a no lien agreement, then it means that you lose your lien rights on the project; but you don’t have to worry about it because you will be backed by the payment bond.
This is also a good reason for you to request a copy of the payment bond at the beginning of the project and comply with its requirements in a timely manner.
b) Early Threat of Liens
Sometimes it is good to threaten liens early and not wait until the last moment. This is because in many cases, just the threat of a lien is enough to get you paid successfully. But of course, it does not work at all times which is why it is good to use the liens and threaten as early as possible.
c) Strict Timelines for Lien Notices
Another reason why you should use liens to threaten early on is because subcontractors in Pennsylvania have only 5 months from the date of last work to serve the notice of lien. A general contractor has 6 months, and this is because anybody who does not have direct contact with the owner is asked to provide a notice of intent to file a lien 30 days before they do it. General contractors do not have to provide this notice of intent to file a lien.
Also, these timelines are strictly enforced. Sometimes it may be difficult to give this notice, and if you wait until the last moment, then you will be putting yourself in a bad situation.
d) Identifying the Property Owner
Another key task that you must perform is to find out who is the actual owner of the property. Oftentimes it is not the owner on the contract. Remember that your mechanics lien is filed against the property and its owner. Sometimes, it can take months to track and find out who is the actual owner of the property and how to serve it. So, finding out all these details in advance can help you avoid a lot of trouble later.
e) Complexities of Pennsylvania Liens
Liens in Pennsylvania are quite tricky and complex. The lien document is in a prescribed form and there is a lot of information that you need to put in. If any of the data is missing or incorrect, it will make your lien invalid. The laws are pretty strict, and liens can become invalid for very technical reasons.
This is why it is best to consult an attorney or reach out to SunRay as we are well-versed with how liens work in Pennsylvania, what are the various lien requirements, what are the deadlines to follow, etc. This way you can ensure that your lien rights are protected.
f) Enforcing Liens and Filing Lawsuits
Once your lien is filed, in some cases that is enough to get you paid and sometimes it doesn’t. In cases where the filing of lien doesn’t result in you getting paid, the next step of action is to file a lawsuit to collect on lien. Now, when you file a lawsuit, it is limited to the value of the labor or materials used. It will not include other things that are not within the lien law.
Key Takeaways
- In case of a breach of contract, initiate a separate lawsuit.
- File a claim for breach of contract and additional damages such as interest, attorneys’ fees, penalties, etc.
- Pay careful attention to key elements related to contracts, payment bonds, and mechanics liens.
- Strategically use these components to exert pressure on the owner.
- Aim to expedite the payment process by addressing legal aspects thoroughly.
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