Tuesday, March 24, 2009

When Contractors Fail to Pay Subcontractors

In most construction contracts, the contractor serves as the general contractor (GC) and hires the subcontractors to do various aspects of the job. It is understood that it is the owner's duty to pay the contractor, and the GC then pays the subs. At least, that is how it is supposed to work.

One of the most upsetting experiences for an owner is when a subcontractor knocks at his door or walks off the job stating that he has not been paid. It is even worse when a sub files a lien on the property. The owners are caught off guard and frequently between a rock and a hard place.

They face a difficult choice: Should they re-pay the subs in order to get the work done, or rigorously defend against subcontractors' claims? In Massachusetts, if the sub's contract is with the contractor, he cannot prevail legally against the for payment. However, this is no consolation for an owner who is defending against a lawsuit, or living in an unfinished house or building.

The reality is that one has to weigh the cost of paying the subs, the likelihood of success in collecting against the GC, the cost of defending against a lawsuit and the consequences of have a lien on one's property, in order to decide what to do. That said, the best remedy is really prevention.

There are two ways to prevent claims from subs. One is to insist on lien waivers as the subs finish their work. This will immediately put the owner on notice if there is a refusal to provide the waiver . The other is for the owners to check in on a regular basis with the subs and ask them directly if they are getting paid. If not, they can immediately confront the GC and nip the problem in the bud. The owner can also cut joint checks to the GC and the subs.

In any event, it is a nasty surprise for owners when they discover that the subcontractors are not being paid. That is why they need to be vigilant and make sure that the situation does not get out of hand.