Thursday, May 29, 2008

When the Subcontractor Does Not Get Paid

There is a great deal of confusion about what to do when a contractor does not pay the subcontractor. The homeowner wonders if he is liable when subcontractors start knocking on his door, saying they are still owed money. Subcontractors are not sure about their rights either. They are upset that the general has not paid them, and do not know what to do next.

Please keep in mind that the following information applies to Massachusetts law. I suspect that other states are similar, but you need to consult with your own legal advisor about these issues.

The general rule is that when the contract is between the contractor and the subcontractor, the homeowner is not liable to the sub for payment.

There is an exception carved out in the law that helps to protect subcontractors, and that is the mechanic's lien law. Mechanic's liens are generally a creature of statute, which means they are governed by a specific law. In Massachusetts, that law states that subcontractors can place liens on an owner's property as long as they follow the specific requirements of the statute. For those who want to read the section of the law that applies to subcontractors, here it is:

Chapter 254: Section 4. Subcontractors; written contract; notice; filing; form; indirect contractual relationship; notice of identification

Section 4. Whoever furnishes labor, including subcontractor construction management services, or who furnishes material, or both labor and material, or furnishes rental equipment, appliances or tools, under a written contract with a contractor, or with a subcontractor of such contractor, may file or record in the registry of deeds for the county or district where such land lies a notice of his contract substantially in the following form:

For a complete version of that section, you can go to:

http://www.mass.gov/legis/laws/mgl/mgllink.htm

Filing a lien is a bit complicated, and it is very easy to do it wrong.

So, the homeowner may ask, how can a subcontractor place a lien on my property when my contract is with the general contractor?

The answer is: that is the subcontractor's right, but whether she will prevail is another story.

The owner is only liable to the subcontractor for the amount of money that is still owed to the general contractor.

So, how does this work in practice?

General contractor abandons the job and has been paid in full. Subcontractors have not been paid. Subcontractor files a lien. Homeowner goes to court to dissolve the lien, proving that the GC has been paid in full. Subcontractor loses. Subcontractor still has a claim against the GC for payment.

GC finishes the job and is still owed $30,000.00. Subcontractors have not been paid and the aggregate amount owed is $50,000.00. There is $30,000.00 left in the pot, and the subcontractors will not be paid in full.

The contract designates that certain payments are earmarked for subcontractors. Those payments are made, but money is still owed to the GC. I would argue that the GC has been paid for the work done by the subs, so no money is owed. However, I have not read case law regarding that scenario.

So, if I am a homeowner, and the subs are not getting paid, what can I do?

1. Write joint checks to the GC and the sub so both have to endorse the check before it is cashed.

2. Ask the subs for lien waivers as they finish their work.

3. Sometimes it is better to pay the subs twice just to get the work done and avoid legal fees and extra costs to complete the job. It's a hard pill to swallow, but try to be level-headed about what you do.

When the GC is in trouble, the first sign is frequently that subs start to complain about not getting paid. The homeowner should respond at the first sign of a problem and address the issue as quickly as possible.

There are some additional technicalities in the lien law that a homeowner may follow, but those would only add further confusion to the issue.

Friday, May 09, 2008

Maintaining Control During a Home Renovation Project

Perhaps the hardest part of dealing with a home renovation project for a homeowner is giving up control of his home. The homeowner has to really have faith in the contractor because she is turning her life upside down and allowing someone else to control her environment. The contractor is automatically in conflict with the homeowner, because he is trying to maintain control of the project while the homeowner is "interfering" in the process. The interference isn't necessarily a bad thing, because it allows for a system of checks and balances.

At the same time, some homeowners overstep and try to micro-manage and drive the contractor crazy. So, how does one maintain a balance and deal with the lack of control?

Rule #1-Start with a good contract. A contract that contains clauses that deal with possible unforseen events helps to protect both parties. Those who are in the business of construction develop these contracts over time as incidents occur during home improvement projects. They learn from the experience and incorporate these obstacles into the contract to protect future parties.

Rule #2-Communicate! Keep the lines of communication open. If you are going to destroy the homeowner's prized azaleas, warn her. If you do not want the contractor to damage your family heirloom, remove it or warn the contractor. If something is getting on your nerves, nip it in the bud, and discuss it.

Rule #3-All change orders must be in writing and signed off on by the parties. It's worth saying one more time. The parties should agree how the change order is going to affect the contract price and the date of completion.

Let's face it. No one likes to give up control; especially of his house or control over her workmanship. However, in the unlikely marriage between homeowner and home contractor, each side must work with the other and compromise in order to achieve the final goal.

Friday, May 02, 2008

The Contractor-Discussing Increases in Price

I have noticed a trend recently in contractor-homeowner disputes. It is a problem that usually occurs when contractors do not follow my cardinal rule:

ALL CHANGE ORDERS MUST BE IN WRITING AND SIGNED OFF ON BY BOTH THE HOMEOWNER AND THE CONTRACTOR. THE CHANGE ORDER SHOULD SPELL OUT THE INCREASE OR DECREASE IN PRICE AND ALSO STATE WHETHER THE DATE OF SUBSTANTIAL COMPLETION WILL CHANGE AS A RESULT OF THE CHANGE ORDER.

The trend is that as the project progresses, the contractor realizes that he has underbid the job, and starts to ask for or negotiate for more money.; or, at the end of the project, the contractor finally works on his accounting, and discovers that he has to bill for a great deal of additional work.

When this occurs, what do you think happens? The homeowner ends up furious, shocked and blindsided by the additional bill, or it does not dawn on him/her right away that he is shelling out much more money than anticipated.

The reason this occurs is obvious: no one likes to talk about money. The contractor discovers that the project is going to cost more than he anticipated, and is afraid to admit it and give the homeowner options. Or, he does not keep up with his accounting, and is slammed at the end of the job, when he discovers that he has been operating at a loss.

So, the moral of this post is that the contractor has an obligation to both himself and the homeowner to bid responsibly and monitor the project as it progresses. If he does run into a problem, he is better off being honest and working with the homeowner. Trying to build in extra costs surreptitiously, or sneaking in an extra bill at the end only provides fodder for irresolvable disputes and ultimately, lawsuits.

So, talk about the money openly and honestly. It will payoff at the end.