One of the most important issues for construction companies is to get fully paid for the work they do. Since the advent of COVID-19, we have seen a rise in payment issues to the point that they have become one of the most contested issues of construction claims.
The following are good business practices that maximize your chances of getting paid properly for the work you do.
A) Obviously, Get The Job Done Right!
I am sure right about now some of you are saying, “Duh!!! Of course you have to get the job done right!” But, what we mean is to have a procedure whereby your staff and especially job site workers know how to not only perform per plans and specifications, but also how to document what they did so you will not have a problem proving it after the fact.
Some of these are procedures are as follows:
- Use RFIs Properly: The proper use of RFIs (Requests for Information) is extremely important so, in case a defect comes about later, you can transfer the risk to the engineer or designer. The RFI can show that the workers asked for guidance and, after they received it, performed per the instructions from the Designer.
- Keep Daily Field Logs/Reports: Keeping proper Daily Field Logs and reports goes a long way in keeping you out of trouble later if a claim or a lawsuit arises. These should show what happened each day on the site, who was working that day, and all the problems that arose and how they were dealt with. These reports and logs can be done on a simple office-generated form, or the many apps that are now available for this purpose. Remember to tell your staff to always have an authorized representative of the general contractor or, if you are the general, the owner, sign the report so it can be used later.
- Keep Records of Inspections: Keep good internal records of both engineers’ and governmental inspections so it is well documented that your work not only passed inspection, but also so you have more detail about the inspection than what the inspector chose to put on his or her report.
B) Invoice Correctly:
Make sure invoicing is done regularly and according to the terms of the contract, observing procedure of turning in invoices, the format for the invoices, the proper documentation and finally, the time limits.
Have one person on your staff make a chart of time limits so none are missed (this is usually the person who is responsible for contract review). This chart should be given to anyone who has any duties for invoicing, as well as the job site superintendent or project manager who may be responsible to provide the items worked on and price of each. Finally, it should be e-mailed to all involved and possibly posted in a conspicuous place at your office.
C) Be Aware of Change Order Hazards
Change Orders are the single most disputed item on a project and the number one reason for payment problems and lawsuits.
The items on a Change Order must be properly identified in detail. Whether the change comes from the owner or your assessment that additional work is necessary, it has to be noted and an authorized person has to sign it so it cannot later be challenged. Make a checklist for your Change Orders. The checklist should include the following:
- The name of the party that asked for the change.
- The exact nature of the change (itemize each item of work due to the change).
- The total addition or subtraction from the contract price. Itemize the price of each item of work due to the Change Order.
- Have an authorized representative sign. It is very important to make sure the person who signs has the authority to sign. So, at the beginning of the project, ask for the name of the Owner’s representative in writing (e-mail or text will do, so long as you keep the e-mail or text) and tell all your job site workers that the only person who can sign is that authorized person.
- Any verbal directives for a change should be confirmed by e-mail and a written Change Order should be issued and signed before the work progresses.
D) Document Any Delays
Delays are costly and another major issue that causes lawsuits and claims. If the Owner or general contractor delay the process of the work, document it via e-mail or letter and tell them that you have been ready to perform but have been kept from your performance. Be specific about why you have been delayed, who caused it and how much time you estimate the delay will last. Then ask the recipient to confirm. A simple sentence such as the following will do: “Please let me know IMMEDIATELY if you do not agree with any of the statements made in this e-mail (or letter).”
Make sure that you read the delay clause of the contract and, if there is a liquidated damages clause where you will be responsible for a certain amount for each day of delay, that you make a note of this and tell the project site workers and your staff about it. This should also go in the chart of time limits noted above.
E) Document the Work Start and Stop Dates
If you are a subcontractor, you must know the date that you started work, because you have 20 days after start of the work to send a preliminary notice to the general contractor and owner which triggers your right to lien and tells them that you will lien if not paid. This is the same for material suppliers. Always send a preliminary notice and, if they ask why, tell them it is company policy and has nothing to do with your relationship. It is not personal.
You must also document the last day you are on the site so you can record a claim of Mechanics’ Lien within 90 days. It is important to note this and know that the first 90 days is to file the Claim of Mechanics’ Lien, but if you do not get paid you still have to file a lawsuit to foreclose on the lien. Once you record a Claim of Mechanics’ Lien, you then have 90 days from the date of recordation to file a lawsuit to actually foreclose on the lien.
IMPORTANT: If you do not file a lawsuit within 90 days from the recordation of a Claim of Mechanics’ Lien, your lien rights will be extinguished and the other side can get it released. There is a misconception that people can hold on to the Claim of Mechanics’ Lien and it is a lien on the property. This is not true. Unless you file the lawsuit and get a judgment, you do not have an actual lien.
A Mechanic’s Lien is the most powerful weapon you have to get paid, so attention to these dates will help you not lose it.
Have one person at the project site responsible for taking progress photos as the job moves along and keeping them with Date Stamps in your files for future use. It is best to have them do this daily at the end of the work day.
G) Keep the Documents Organized
Disorganization is the origin of a lot of problems that can result in claims or lawsuits. Keeping important documents is crucial, and even when you keep them but they are not organized properly, the time wasted by your staff and attorneys to try to find all documents will cost you a lot.
Having separate files (today mostly electronic files) for each project, that are kept and organized properly is essential and can be the difference between winning and losing the case. Keep the following in your files:
- Contracts (including the Prime Contract, General and Subcontracts)
- Insurance Certificates (yours and those of all your subcontractors)
- Technical documents: Plans, Specifications, Engineering reports
- Governmental Documents: Inspection reports, permits
- Change Orders
- Correspondence, including e-mails and texts
There should be a file for the Prime and General contractor, as well as each separate subcontractor with the above information properly organized in it.
H) Communicate With Others Before Problems Escalate
Having a good line of communication with other parties performing work at the job site, especially with your general and subcontractors, will avoid a lot of issues. Problems can be solved by discussion and collaboration at the initial stages. Picking up the phone and talking to someone or doing it face-to-face goes a long way in resolving differences early on before payments are missed or delayed.
I) Know a Good Advisor
Finally, you should have a team of advisors that you can call on to prevent issues: a CPA, an insurance broker, a bond broker and an attorney. These should be people specializing in Construction who know what to look for and how to avoid problems.
A good construction attorney can help draft and review your contracts, guide your staff as to how to do or not to do things to avoid problems, and advise you during the course of your project. In addition, just picking up the phone and talking to an attorney when small issues arise can help prevent problems before they escalate.