Contractors are responsible for paying the subcontractors they hire to work on construction projects. Payment usually happens according to the terms of the contract, but issues can cause delays or lead to subcontractors not being paid at all.
Delayed payments are quite common in the construction sector. In 2022, 49% of subcontractors said they waited 30 days or more to get paid after completing a job.
This can be challenging because, as a subcontractor, you must cover your costs and provide payment to laborers who work for you. In many cases, state laws outline the steps subcontractors need to take to hold contractors liable for missed or delayed payments. You need to be aware of your options when confronting this issue.
Here is a closer look at late payments and the steps and options available to deal with the problem and obtain fair compensation.
Can a Contractor Legally Withhold Payment?
The exact laws and timeframe for payments to subcontractors vary by state. However, in most places, a contractor can legally withhold payment if the subcontractor does not complete the project according to the terms of the agreement. Also, some agreements have pay-if-paid clauses that allow contractors to withhold payment to subcontractors until they get paid for the job.
Subcontractors who work for the government are protected by prompt payment laws. Government agencies must pay interest on the balance due if they do not make payments on time. Almost all state governments also have prompt payment policies, and many states also have rules for prompt payment for private projects.
These rules potentially penalize non-payment to subcontractors, but they still require the work to be completed according to specifications.
Common Reasons for Late Payment
Non-payment could happen for different reasons, not all of which are under the contractor's control. Here are the common causes of late payments in the construction industry.
- Contractors may make estimate or budgeting errors during takeoff, and these mistakes could cause a loss in revenue that doesn’t leave enough to cover subcontractor costs.
- Incorrect or delayed invoices could lead to late payments from the project owner to contractors.
- Storms, accidents, or other disasters could cause delays to the project or lead to its cancellation.
- Contractors and tradespeople could disagree on whether or not the project is complete according to specifications.
While disputes or unforeseen disasters may be difficult to avoid, proper planning using takeoff software to make accurate estimates. Contractors can use these tools to calculate the cost of materials and establish a timeline for the project, accounting for all variables that affect their costs and subcontractors’ fees.
How Long of a Time Period Do Contractors Have to Pay Subcontractors?
Payment deadlines can vary by contract and differ by state for both public and private projects. However, many states provide specific timelines for subcontractors to receive payments, and most also cover contractor payments from project owners.
Times can range from 14 days to 90 days from invoicing or project completion date for contractors. Most subcontractor deadlines are faster, with laws giving contractors one to two weeks from receipt of their payment to pay subcontractors and suppliers.
Contracts for specific projects may specify payment timeframes that are different from state laws. Public project contracts may require compliance with state prompt payment timelines, but these rules can vary.
If A Subcontractor Is Not Paid by a Contractor, What Are The Subcontractor’s Rights?
Many states have penalties, such as fines or interest payments, for project owners and contractors who fail to provide payment within the specified timeframe. Also, state rules may allow subcontractors to stop work if they do not receive on-time payment during a project. In most cases, stopping work involves first notifying the contractor or project owner of the date that you intend to stop working.
In all cases, subcontractors need to fulfill all obligations outlined in the contract before they take any legal steps to get late payments.
In addition to service requirements, contracts also need to outline other factors. The agreement should detail the safety provisions provided and explain the steps subcontractors need to comply with safety requirements on job sites.
The document also has to contain a non-discrimination clause, and it should outline the steps each party can take to resolve disputes related to payment or deliverables.
What Can You Do if a Contractor Has Not Paid You as a Subcontractor?
As a subcontractor, you can take specific steps if you do not get paid on time. Here is a look at how to proceed after a payment due date passes.
- Communicate with the contractor. Contractors may be willing to provide payment updates, explain the situation, or make alternative arrangements, such as partial payment or installment payments.
- Remind contractors of prompt payment laws in your state. These vary, but most states have a pay-when-paid requirement that says contractors need to pay subcontractors within seven to 14 days of receiving their payment from the project owner.
- Suggest a third party to handle the payment of late funds. A mediator can offer unbiased opinions about reasonable payment timeframes and the fulfillment of contract obligations.
Contractors and project owners often wish to avoid legal disputes. If you are willing to negotiate with them in good faith, you may be able to find a solution. However, if you cannot negotiate, legal action could be necessary.
Options for Legal Recourse
As a subcontractor, you have several legal options to deal with non-payment. The contract or your state’s prompt payment laws may outline legal steps that you can take to pursue payment.
One of the most common ways to deal with non-payment is to put a mechanic’s lien on the property. A mechanic’s lien gets attached to the property deed and remains there until you receive full payment. It entitles you to a portion of the property equal to the value of your work.
You file a mechanic’s lien with the county where the work occurred. After filing, you need to notify the paying party of the lien.
This is a good option because it makes it difficult for the property owner to sell or make changes to the property without first paying you.
How To Avoid Issues With Late Payment
While late payments are sometimes unavoidable, you can take steps to deal with some of the more common causes of late payments before the project starts.
- Carefully estimate costs at project takeoff so that contractors are aware of your expenses.
- Document work and verify approval to show that you have met contract requirements.
- Rely on technology to calculate materials estimates and maintain proof of accurate calculations to avoid cost disputes.
Ensure estimates are up-to-date by using software to calculate materials and costs if the contract or project requirements change. Do not begin work until the new requirements and payment details are finalized.
You need to be aware of your rights and requirements as a subcontractor and understand the steps you should take to deal with late payments for contractors.
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