Collection Tips for Subcontractors
Collecting as a Subcontractor: Tips You Need to Know
One of the most common types of collection matters our firm sees is subcontractors who aren’t getting paid on a job. If you work as a sub, knowing who you can collect from, what collection tools are available to you, and taking care to reduce disputes can make a big difference in your bottom line.
Collecting from General Contractor
1) Get it in writing. If you are hired by general contractor to work on a project, you need to have a written agreement for your services. This agreement should include, at a minimum, the scope of work to be performed, any deadlines for performance, and payment terms. It should also allow for recovery of collection costs and attorney’s fees if you aren’t paid. A written agreement will also reduce disputes about scope of work or fees, provide leverage if the general is slow in making payments, and make collection feasible by allowing you to recover costs incurred. I understand that many subs feel that using written contracts are too much hassle on small jobs. Just keep in mind that if the amount you’ll invoice is enough to be missed if you’re not paid, then it’s enough to justify using a written contract.
2) Keep up with changes. Always update the agreed scope of work as the project changes. One of the most common problems we see is when a sub is hired to perform a certain task, but is later asked to do more and more work. Too often, this additional work is not accompanied by a change order or any written record of what was actually requested or authorized. This leads to disputes when the sub presents an invoice for more than the initial estimate. It is very difficult to recover for those undocumented work requests. Ask yourself: is the value of what I’m doing worth 5 minutes to fill out a change order or send an email confirming the request?
3) Insist on prompt payment. When the general has invoiced the customer for your work, the general must pay you within 10 days of receiving the funds from the customer. If the general fails to do so or applies those funds to pay someone else, Minnesota law allows the general to bring a claim against the general for all sums owed, interest at 1.5%, and costs associated with collecting the amount owed. The general can also face criminal and licensing sanctions for failing to turn over funds paid for the subcontractor’s work. Finally, misappropriating those funds can be used as a basis to prevent your claim from being discharged if the general declares bankruptcy.
Collecting from the Property Owner
Often there is no contractual relationship between a subcontractor and a property owner, so a mechanic’s lien is your best option for collecting from the owner. A mechanic’s lien gives you a security interest in property that you provided improvements for. That lien is good for one year and will have to be paid before the property can be sold or refinanced during that period. Within that time frame you can also use the lien as the basis for a lawsuit that can result not only in a money judgment (including attorneys’ fees), but also the ability to force the sale of the property to collect amounts owing to you.
Mechanic’s liens are available to contractors, suppliers, design professionals, surveyors and others who provide a permanent improvement to property. It is important to note that maintenance work such as mowing or plowing is not considered a permanent improvement.
In order to be eligible for a mechanic’s lien, you will generally need to provide the property owner with a valid pre-lien notice within 45 days of your first contribution of work or materials. Also, you will need to serve the owner with a lien statement and record that lien statement at the county within 120 days of your contribution to the job. The requirements for mechanic’s liens are extraordinarily strict. One change to the statutory pre-lien notice, one error in the lien statement, one day late on a service or filing deadline can invalidate your lien. It is highly recommended that you work with an attorney in placing your lien to ensure that one small mistake doesn’t cost you your chance to collect.
If you work as a subcontractor, be sure to that you’re taking the steps to help you collect for the work you do.