For some contractors, the winter holidays can bring on a welcome change of pace, allowing them to spend some much-needed time away from the office and worksite and with friends and family. The winter season also provides an ideal time for contractors to step back and evaluate those areas in which they can improve upon from a legal and practical standpoint.
An experienced construction attorney will tell you that the vast majority of legal headaches faced by contractors evolve from the same handful of contractual issues — some if not all of which are completely preventable. Here are five suggestions to avoid those headaches and keep your legal costs low:
1. Establish clear contractual terms for receiving payment.
If you are a general contractor, consider inserting a “pay when paid” clause in your sub-contracts. “Pay when paid” differs greatly from a “pay if paid” clause: the latter is only allowed under a limited set of circumstances pursuant to the Massachusetts Prompt Pay Act. All contractors must understand the difference between these two common terms.
If you are a subcontractor, you should include a provision that allows you to stop work if payment isn’t made within a reasonable time period. When properly invoked, a “stop-work” clause can protect you from a counterclaim of abandonment raised by a general contractor when you stop work for non-payment.
2. Maintain consistent billing practices
It is crucial for contractors to negotiate a detailed payment schedule before signing any contract. Payments should be based on regular time intervals, preferably weekly, or specific work milestones broken down with as much specificity as possible (e.g. payments to be received “after air enclosure built, after debris collected, and after off-site disposal,” for example, not simply at the end of disposal job). Make sure that only licensed personnel are undertaking and billing for services requiring state registration, licensure or certification. Finally, if you are billing on a time and materials basis, be sure that the same individual from your company is not only billing out the client on a regular basis, but communicating directly with the client to review any questions that he or she might have about your fees.
3. Know how and when to request change orders.
It goes without saying that contractors want to be paid the full value for any change orders that arise on a project. Change orders should always be made in writing and note (1) the change in contract price, if any, and (2) if and how the change order will extend the date of substantial completion. Under the Massachusetts Prompt Pay Statute, the owner or higher-level contractor must state the legal or factual basis for rejecting a change order, in writing, and certify that the rejection has been made in good faith. The written rejection must be provided to the contractor within a specified period of time, depending on the level of work that the contractor is performing (general, sub, sub-sub, etc.).
4. Streamline your process for filing mechanics liens and pursuing payment bonds.
A mechanic’s lien is one of the most effective ways for contactors to secure payment for their labor and materials. Unfortunately, contractors all too often miss the boat on utilizing this legal tool. Streamlining your process for lien filing begins with the careful tracking of your billings, in order to quickly identify any past due amounts from the owner or higher level contractor. If you are a second-tier or lower subcontractor, you should file a Notice of Identification with the general contractor upon starting work, in order to preserve your right to file a lien for the full amount of any outstanding invoices. Otherwise, your lien will only be valid up to the amounts due to the higher-level contractor.
Your office should also monitor any problems that may lead to a stoppage on work or payments – for example, late or reduced payment from the general contractor to the sub- or lower-tier contractor or supplier. Keeping abreast of such matters will ensure that a valid and timely Notice of Contract is filed, before the general contractor abandons the project or is terminated from the job (thereby freezing and possibly eliminating any funds to satisfy a lien).
Depending on your project, a public or private bond may be furnished to guarantee payment, whether or not your contract is with the party obtaining the bond. Prior to starting work, you should understand any conditions attached to the bond regarding notice from lower-tier subcontractors, and the timeframe for commencing suit under the bond.
5. Ensure compliance with state law on residential contracting agreements.
The Massachusetts Home Improvement Contractors Statute imposes strict penalties for violating “prohibited acts” with respect to residential contracting agreements. The failure to include a laundry list of state-mandated contract provisions, some more standard than others, constitutes one such “prohibited act.” Contractors should review this law with their attorney, and come up with a checklist for compliance. At the very least, contractors should contact their legal counsel in order to determine whether their work on a contemplated project falls under the statute’s broad coverage, which applies to nearly all existing home restorations, additions and alterations (though a number of specific jobs and contracting entities are excluded from coverage). Violations of the statute may subject a contractor to three times the actual damage caused to the homeowner, and otherwise severe penalties, even if there turns out to be little actual harm caused as a result of the contractor’s prohibited conduct.
If your company has questions about any of the issues described above, contact Mirageas & Avery, LLC .