In this blog, presented by SunRay Construction Solutions, you will learn what these various tools and measures are and how to use them to resolve your payment issues quickly and successfully.
Key Points to Discuss
The three key points that we will be focusing on in this blog are:
1. Negotiating the subcontract agreement
⁃ Pay-if-paid clause
⁃ Incorporate your proposal
2. Sending your lien notice – Involve the owner to help get you paid
3. Sending your bond notice – Involve the Surety to help get you paid
These are all the things that you can do to mitigate your risks and create leverage to get paid faster on construction projects. Let’s look at each of them in detail.
The first thing that you need to do is look at your subcontractor’s contract thoroughly and pay attention to three things:
A Pay-if-paid clause is quite common in Texas subcontract agreements. However, if it is possible, then it is highly recommended that you negotiate any pay-if-paid clause. Typically, a pay-if-paid clause reads as:
- Payment to Contractor by Owner is a condition precedent to the Subcontractor’s right to receive payment and Contractor’s obligation to make payments hereunder. Subcontractor acknowledges and agrees that it hereby assumes the risk of non-payment by Owner to Contractor.
- What the above statement ideally means is that the subcontractor will bear all the risk of the owner’s non-payment to the contractor and therefore, contractor’s non-payment to the subcontractor.
- By negotiating this pay-if-paid clause, you can eliminate the contractor’s ability to say that they haven’t paid you because the owner has not paid them.
- However, it is often not easy to negotiate out this clause. A workaround is that you convert the pay-if-paid clause to a pay-when-paid clause. This will just remove all the conditional language, thus helping you in the long run, if a payment issue arises.
Another thing that you can negotiate on in your subcontract agreement is an interest provision.
- Under the Texas Prompt Payment Act, contractors and subcontractors are entitled to 1.5% interest each month on overdue amounts for which the contractor has received payment from the owner.
- Although you are protected by this statute, it is highly recommended that you incorporate a similar provision with a similar interest rate directly into the sub-contract agreement.
- This way, even if the contractor is not aware of the Texas construction laws and rules, you can just point towards this provision in the contract when a payment issue arises.
- You can also negotiate this provision in such a way that it is not contingent on the owner’s payment to the contractor but is an outright interest that's going to accrue once the invoice is overdue.
This will create leverage when a payment issue arises because the contractor will be aware that the interest is accruing on those outstanding invoices.
C) The Proposal
The last point to negotiate on in your contract is the proposal. A common problem that arises is the understanding of the work scope and determining how to eliminate the various ambiguities.
- Subcontractors put in a lot of time and effort to put together a proposal to detail the scope of work offered, including exclusions.
- Typically, the contractor accepts the subcontractor’s proposal by issuing their form Subcontract Agreement for signature. These subcontract agreements don’t contemplate the inclusion of your proposal, and rather have standard line items for scope of work. They also do not include the potential exclusions that you may have included in your proposal.
- So, as a subcontractor, you need to consider whether the scope of work that's detailed in the contractor's subcontract form agreement tracks that of your proposal that you submitted. And to eliminate the risk, you need to consider whether you want to specifically and expressly incorporate your proposal into the subcontract agreement.
- This will help you to eliminate various issues, such as whether work is base scope or requires a change of order.
Just ensuring that the scope of work is clear can help eliminate several ambiguities and reduce the risk of unwanted issues down the line.
Types of Construction Projects
Preserving your right to payment will differ depending on the type of project that you're working on. So, it is very important to have a clear understanding of what type of project you are working on:
- Commercial, private project (can be bonded or unbonded)
- Residential, private project (typically unbonded)
- State public project (must be bonded)
- Federal public project (must be bonded)
The Lien Notice
Let’s take a look at some of the lien requirements.
A) Creating Leverage & Mitigating Risk
- If you are working on private construction projects, you must send a pre-lien notice to the general contractor and the owner.
- When a payment issue arises, the goal of this pre-lien notice is to alert the owner that there is a payment problem.
- Alerting the owner can help in getting you paid because the owner has an interest in keeping their property free and clear of any liens.
- So, once the owner receives this notice, it will trigger a chain of events whereby the owner will reach out to the contractor to find out why the payment has not been made.
- The owner is required to withhold funds from the general contractor to satisfy your claim. If they fail to do so, they will have a liability for those amounts.
B) The Pre-Lien Notice
The Texas Property Code sets forth a standard form for pre-lien notice for unpaid labor or materials. They also have a standard form for unpaid retainage, and you can combine these notices. A key statement in these notices read as:
- The owner’s property may be subject to a lien if sufficient funds are not withheld from future payments to the original contractor to cover this debt.
This language provides the required notice to the owner to withhold the funds from the contractor.
C) By When to Send the Pre-lien Notice?
A subcontractor must send the pre-lien notice by the 15th day of the third month after the labor or materials were provided. Remember that the 15th day of the third month is the time in which the labor and materials were provided and not from the date of invoice.
- For example, you performed work in April, May, and June for which you have not been paid. The earliest month for which you were not paid is April which means that your deadline to send the pre-lien notice is the 15th of July.
- This pre-lien notice should also include the unpaid amounts of work performed in May and June.
- If there are unpaid amounts in July as well, then you need to send an update notice to ensure that you are perfecting and preserving your lien rights.
You also have a deadline to file your lien affidavit which needs to be filed within the 15th day of the fourth month after you complete your work.
- For example, if you complete your work in August, then you should file your lien affidavit no later than 15th of December.
The Bond Notice
If you are dealing with bonds on private projects, the deadline and notice requirements are like what we discussed in the previous section (the lien notice). There is one addition that along with sending the notice requirement to the general contractor and the owner, you also need to send it to the surety.
Below are other requirements that you need to adhere to:
A) Creating Leverage & Mitigating Risk
- If you are working on public construction projects, then the bond notice must be sent to the general contractor and the surety.
- Sending it to the surety will again help you in getting paid because they will investigate the payment problem, and they have an interest in ensuring that the contractor satisfies the debt.
- This will also protect you in case of insolvency, ensuring that the surety is there to back the project financially.
B) The Bond Notice
- Unlike the pre-lien notice, there is no specific ‘form’ of the bond notice. You just need to include all the basic information that you would include in a pre-lien notice.
- In addition to the basic information, the bond notice must include a sworn statement of account stating:
- The amount claimed is just and correct; and
- All just and lawful offsets, payment, and credits known to the affiant have been allowed.
- Since this is a sworn statement, you must ensure that it is notarized and signed before submitting it to the surety and GC.
- The bond notice must also include the amount of any retainage applicable to the account that has not become due.
C) By When to Send the Bond Notice?
- For a first-tier subcontractor, the bond notice must be sent by the 15th day of the third month after the labor or materials were provided.
- For a second-tier or lower subcontractor, the bond notice must be sent by the 15th of the second month after the labor or materials were provided.
So, to summarize, the three key takeaways about getting paid faster are:
- Negotiate your subcontract agreement in the beginning itself.
- Send your lien notice in a timely manner including all the entities that may have a liability if the contractor does not pay you.
- Send you bond notice in a timely manner including all the entities that may have a liability if the contractor does not pay you.
Need help with your Texas Project Payments? Use our system to seamlessly protect your lien rights. Contact our experts at 800-403-7660 for legal assistance. Stay ahead in handling your lien and notices with SunRay!