by Mark A. Cobb
Tragedy faced many construction business during the Great Recession. It impacted every layer of business from project developer and large prime contractor to building material supply stores and day laborers. Virtually no one was left unscathed.
This year, thankfully, there has been a turn-around in the construction industry. There are new public projects, new industrial and commercial projects, and new home construction. In fact, we poll our clients constantly, and the signs of prolonged improvement to construction economics are evident. Nonetheless, we should not forget the lessons that were learned during those recent, lean years.
Smart businesses learned from the mistakes revealed during the recession, and they have improved their efficiencies, they have reduced waste, and they have recognized the need for customer appreciation. When our clients call us and ask us to help consult on their construction business, we start with areas which devastated many industry participants. Here are some of the common suggestions which we make:
1. Fix Your Customer Contracts! Many specialty trade contractors have never used an attorney to prepare their construction contracts; or, if they did, it was a long time ago. This is a big mistake. True, laws change and your contracts should reflect these changes, but, more importantly, many client’s contract give up their rights because they started with sloppy contracts. For example, it is easier (and less expensive) for you to collect attorneys fees when you go after the money you are owed if your contract adequately addresses attorney’s fees. Unless an experienced construction lawyer has worked with you on your contract, then you may forfeit these rights.
2. Negotiate/Review Your Contracts: When a subcontractor works for a prime contractor, it is typical that the GC provides the subcontractor with a contract to sign. Wait! Have a competent Georgia construction attorney review the contract and negotiate it on your behalf. If you blindly accept the contract because “you need work” or because you are “too busy”, then you are gambling that the contract will protect you in case of a contractor’s failure to pay. In addition, due to the limited, skilled workers in the field, a subcontractor may have an easier time negotiating its contract than expected.
3. Shore Up Your Credit Applications: Business is good right now, but it’s worth taking time to update your credit applications, personal guarantees, credit card authorization forms, etc. The steps you take now can save you money in the long-run (and increase your recovery!)
4. Due Diligence: It doesn’t matter whether you are a large national general contractor or a local specialty trade subcontractor, few parities use the opportunity to conduct meaningful due diligence on their business relationships. We saw this failure to conduct due diligence bankrupt businesses in the second and third years of the recession, yet, it was totally unnecessary.
5. Document! Document! Document! Although it has been (and will always be) a significant area of contention, change orders presented many hurdles for subcontractor payment issues during the recession. Prior to performing work on a change order, make sure that you have the WRITTEN CONSENT of the general contractor and the owner of the project. Yes, its frustrating, yes its
6. Document Problem Areas. Similarly, when any issue erupts on a project site, document it, and document well. For example, keep thorough, complete daily logs, take photo graphs, document the issues in writing. Also, of course, make certain that you meet any notice deadlines required in your contract.
7. Be Wary of Email. Email (texting too) is a blessing and a curse in the construction industry. Email consents can be useful, however, they tend to be vague and / or out of context. When it come to something important, write a letter–at least write a “letter-style” email which is more formal. Assuming your contract doesn’t contradict this, you can probably send your letter via email, but a letter forces most writers to more-fully develop the situation and place it in the correct context. This can save ambiguity, confusion or “he-said/she-said” situations down the road.
8. Watch Out for Georgia’s Lien Waivers. If you execute a partial or final lien waiver in Georgia, make sure that you get your money very quickly. If you don’t get the money you are owed and if you don’t take certain steps within 60 days of the date of the lien waiver, then you may forfeit your right to payment forever. Assuming that a lien release is submitted with each pay app, then letting any invoice be out longer than 30 or more days hurts subcontractors immeasurably. Keep an eye on your receivables and remember to file either an Affidavit of Nonpayment or a Claim of Lien within 60 days of the date of your lien waiver for an unpaid Application for Payment.
9. Send a Notice to Owner/Contractor! During the recession, we hated telling clients that they had forfeited their rights to file a materialmen’s lien in Georgia because they had failed to send a timely Notice to Contractor / Notice to Owner (other states refer to this document as a Notice of Furnishing or Notice of Commencement of Work). Under current Georgia law, those in privity of contract withe the owner (i.e., general contractors and 1st tier subcontractors) do not have to send the NTO; those who lack privity of contract with the Owner (i.e., sub-subcontractors and material suppliers) must send an NTO within the first 30 days in which they begin work on the project or begin supplying to the project. Although this may seem like a hassle, it’s an inexpensive step and can increase your recovery rate significantly.
10. Payment Bond Claims. Many credit managers and construction professional understand that (most) government projects are required to have a payment bond in place for the benefit of subcontractors and suppliers; however, many do not know that often there are payment bond on private projects as well. And, if they don’t know about the payment bonds and don’t make a timely claim against the payment bond, then they may be losing a potential source of recovery. Don’t forget to look for payment bonds covering private projects!
11. Design Professional Have Rights Too. Traditionally, architects and engineers do not experience the same level of payment problems as other construction industry professionals, and this is usually credited with the fact that they are often paid first. The recession changed this, and all service and design professional have rights which may include the right to file a claim of lien for the money they are owed. Don’t let ignorance of Georgia’s law or professional “pride” prevent you from getting your payments by timely filing a lien for design services.
12. Mechanics & Materialmen’s Liens/Payment Bond Claims. Since we’ve been in this business for over 20 years, it’s hard to understand why everyone doesn’t file a lien if they don’t received payment for their materials, labor, services or equipment which they provided to a project. It’s vital that you meet the deadlines and all the technical requirements for filing a lien. Don’t let missing a deadline stop you from getting paid. Also, don’t forget that you can file a lien for your retainage — don’t let the time lapse to take this vital step.
Now, is a great time to position your construction business for the future, and the steps which you take now can make a world of difference tomorrow.
The Cobb Law Group is pleased to announce the publication of its latest handbook–the Georgia Material Supplier Collection Handbook! This long-overdue collection guide will help credit managers, business owners, and material owners collect the money they are owed on construction projects in Georgia by providing essential tips for filing and enforcing mechanics and materialman’s liens, payment bond claims and other issues related to construction commercial collections. It is particularly helpful for construction material suppliers who deliver building materials to project sites anywhere in Georgia.
To download your free copy of the Georgia Material Supplier’s Collection Handbook, please click here > >
What Does the Free Guide to Georgia Materialmen Law Cover?
Although its impossible to cover every aspect of Georgia law in a single volume, this free handbook provides useful summaries of Georgia law and practical tips for credit managers and business owners. The topics included in this guide for collections includes the following:
- Summary of Important Deadlines for Notices, Affidavits, Lien and Payment Bond Claims;
- Checklists for Credit Managers to Consider before they Open Accounts for New Customers;
- Georgia’s Statutory Notice Scheme (Does it apply to you?);
- Georgia’s Lien Waivers (including unconditional waivers vs. conditional waivers);
- Georgia’s Prompt Payment Act;
- Using Preliminary Liens in Georgia to Help You Collect;
- A Summary of Georgia’s Mechanics and Materialmen’s lien laws;
- The Basics of Payment Bond Claims (Claim Against the Surety);
- How to Handle your case in Magistrate Court (Georgia’s small claims court); and
- Post-Judgment Collection Tips
Who Needs a Copy of their Free Guide to Georgia Construction Collection Law?
Anyone who has supplied materials or preformed services or labor on a construction site in Georgia needs to read this great guide. Using this resource as a guild, it can help you prevent collection issues before they arise, and it can help you enforce your rights to file a construction lien or make a payment bond claim to recover the money they are owed including the following:
- Credit Managers;
- Credit Analysts;
- Business Owners;
- CFOs and Comptrollers;
- Manufacturers of Building Materials;
- Account Receivable professionals;
- Building Supply Companies such as electrical supply, roofing materials, truss and framing supply companies, irrigation and plumbing supply companies, and many, many others;
- Potential Lien Claimants;
- Potential Payment Bond Claimants;
- Anyone who is owed money on a Georgia construction project; and
- many others
What is Included in this Guide to Georgia Construction Lien Law?
We include a long list of potential deadlines which can mean the difference between getting paid for your services and not including the deadlines for the following:
- Filing of a Notice of Commencement by a General Contractor
- Notices to Owners and Notices to Contractors
- Affidavits of Nonpayment
- Georgia Preliminary Construction Liens
- Mechanics and Materialmen’s Liens
- Payment Bond Claims (Miller Act Claims)
- Lawsuit Filing Deadlines to Enforce Lien Rights
- Notice of Contest of Lien
- Bond Claim Lawsuits
- Notice of Action of Filing Suit
In addition, this free guide to commercial collections for the construction industry includes the following, practical checklist to help you improve your rate of recovery almost instantly:
- Items to Add to you Credit Application
- Useful (time-saving and cost-saving) Contract Terms
- Personal Guarantees
- Georgia’s Statutory Notice Scheme (Pre-construction Notices)
- Internal Accounting Procedure Summary
- Suppliers Obligations
- Practical Tips for Credit Managers
- Options if Lien Waiver is Signed but Payment is Not Received
- Checklist for Filing Preliminary Liens
- Important Considerations for Georgia’s Construction Liens
- Statutory Requirements for Mechanics Liens
- Payment Bonds Covering Public Works
- Payment Bonds Covering Private Works
- Litigation Tips
- Post-Judgment Collection Resources
- Construction Legal Services
Download Your Free Copy Today!
To get your own copy of this important resource on Georgia construction law, please click here > >
Order Your Free Printed Copy of this Handbook for Georgia Materialmen:
In addition to the free download, we are also giving away printed versions of the Georgia Material Supplier Collection Handbook (while supplies last). To request a copy of this great summary of Georgia’s lien and payment bond law, please send an email request to us at either firstname.lastname@example.org or through our contact us page. Please be sure to include the number of copies you want and a valid mailing address.
If you find this Guide to Georgia’s Mechanics and Materialmen’s Lien useful, then you may also want to schedule a specialized training session for your staff or professional organization. Our construction law attorneys have helped to educate credit departments and business owners all about their rights and obligations under Georgia’s lien laws. We have helped to train the credit departments of some of the largest building material suppliers in the country, and, when we train your employees, we will customize our presentation to your specific industry using your common credit scenarios. For more information on our training and lecturing opportunities, please click here > >
by Mark A. Cobb
As humans, we use milestones to mark our journeys; as one year fades into another, it is natural for us to claim the calendar change as an opportunity to make changes within ourselves. Fortunately, in 1885, the Church of England’s Bishop Beckwaith provided us with a useful formula for making effective and permanent changes in our lives:
Plant a thought and reap a word;
Plant a word and reap an action;
Plant an action and reap a habit;
Plant a habit and reap a character;
Plant a character and reap a destiny.
The most successful humans are leaders in both their personal and their professional lives; consequently, those who want to succeed are willing to change–to improve themselves, their businesses and their lives. Thus, without any pretensions, we offer this year’s list of the Top Ten New Years Resolutions for Construction Professionals:
10. Take time to understand the other person’s position:
It doesn’t matter whether you are a design professional trying to fit your client’s desires (and needs!) into a budget or whether you are a project manager negotiating a change order with a subcontractor, it is very important to recognize the validity of the other person’s opinion. Acknowledging and understanding another person’s position can go a long way in avoiding potential disputes or quickly resolving a current dispute. Respect appears to be disappearing in the construction industry–promise to prevent its further erosion in the new year!
9. Money is important, but it isn’t the most important thing:
With today’s increasingly tight profit margins, even small bumps can derail projects and bankruptcy contractors, thus, there is an ever-increasing temptation to deny payments to those downstream, to cut-corners where corners should not be cut, and to worry more about your own job-security than the success of the project. Do not give sway to these temptations. Instead, be professional; treat others the way you wish to be treated, and look for a successful project completion for all of the participants. This is a wonderful time to remember that reputation, dignity, and honor trump profits in every long-run scenario.
8. Use fair and balanced construction contracts:
We see more and more general contractors handing down increasingly onerous construction contracts which could be summed up with the following statement: “Subcontractor Agrees to do anything and everything the Prime Contractor requires (whether known or unknown to the Subcontractor); and, for this work, the Subcontractor will only be paid the amount stimulated below if and when the Prime Contractor wants to.” This is neither fair nor right. Contracts have become solely about transferring risk and listing reasons to withhold payment; instead, we argue that construction contracts should be about ensuring mutual successes on a given construction project, reaching just conclusion in the event of a (real) dispute, and cooperation between the project owners, prime contractor, subcontractors and material suppliers.
7. Watch those emails and texts:
Almost daily we are appalled by construction professional’s reliance on text or emails to transmit important communications and even contractually required notices. Unfortunately, this type of communication lends itself to a “too concise” ability to communicate and “too casual” form for addressing important topics. If something is important, then take the time to write a letter (it forces you to be more professional, more accurate and less likely to be misinterpreted) and attach it as an email. Do not let text and email “conversations” be substitutes for meetings where you can meet face-to-face. And–frankly, we are shocked about this–watch the curse words and pejorative statements in your emails. They can (and will) be used against you.
6. Manage Your Stress:
From project scheduling to unexpected weather conditions, from slim profit margins to job security, the construction industry is filled with stress. There are wonderful resources available to help everyone deal with stress, so promise to avail yourself of some of these resources. Remember to spend time with your family, relax, and, if necessary, find a new job! Stress damages your physical body, it decreases your profitability, and it destroys relationships.
5. Know your contracts:
If our clients had taken the time to review their construction contracts and the possible consequences of a breach or a problem, they could have prevented many problems. It may seem boring or redundant, but review every contract as if it were your first contract; then, as the project continues, occasionally review the contract to remind yourself of potential pitfalls and notice requires. Meet EVERY notice obligation which you have. If you don’t have the time, desire or interest in doing this, then find a competent construction lawyer to help you manage this aspect of your business.
4. Set realistic, positive goals:
If your business isn’t growing, now is an ideal time to evaluate where your business has been and where you want it to go. Consider establishing a business plan and/or a marketing plan. Consider joining professional organizations which can help you with these projects (such as the American Subcontractors Association, Associated General Contractors, Construction Suppliers Association, etc.). Take a look at the type of projects on which you work and whether or not these are the projects which you want; consider taking on larger projects (but don’t stretch yourself too thin); if you are not currently bonded, take steps to build a relationship with a quality surety.
3. Treat your employees well:
This one should be obvious, but the stress, economic limitations, and competitive bidding can make employers forget that their employees are their finest asset. There are many ways to improve employee relations, and only some of them involve money! Provide educational opportunities, safety training, positive recognition, even treating an employee to lunch can lead to a more satisfying workplace.
2. Build the next generation of construction professionals:
It is universally acknowledged that the skilled-labor work force is diminishing at an alarming rate, and that means labor shortages and increased labor costs for every prime contractor and subcontractor. We advocate adequate training for your employees, but don’t forget the next generation of employees. There are countless opportunities to work with your area technical colleges to build programs specific to your needs, if you are looking for a place to make a year-end donation, consider funding a scholarship at your local school to train the next electrician, mason, or project manager! Be creative and participate in a grass-roots program to stimulate young people to pursue careers in the construction field.
1. Be honest.
This one, too, should be obvious. Be honest with your yourself–know your strengths and weaknesses and strive for improvement. Be honest with your family and your co-workers; truthfulness builds respect from those around you. Admit your mistakes, acknowledge when others are right (even though you may be wrong), and build your destiny on a solid foundation.
Whatever your goals are for the coming year, the construction attorneys at the Cobb Law Group wish you success. Now is a great time to plant the thoughts directed by Bishop Beckwaith to create a new destiny for yourself and your business.
When a building material supplier has not been paid for labor or materials used on a Georgia construction project, that supplier may place a materialman’s lien against the owner of the improved real property; this is true even if the owner has no contractual relationship with that supplier. Such a lien essentially transfers liability from the party contracting with the supplier (such as the general contractor) to the owner since the supplier’s goods and services improved the value of the owner’s property.
In Hill v. VNS Corporation d/b/a Choo Choo Lake Oconoee, et al, a case decided earlier this month by the Fourth Division Court of Appeals of Georgia, the plaintiff, a building supply company, sued the property owner to enforce a materialman’s lien against that property, but the court of appeals did not agree with the activities of the trial court and reversed the trial’s court’s decision.
Background & Facts: The owner had contracted with a custom home-builder general contractor, who in turn purchased materials from the plaintiff for use in constructing a house on the owner’s property. The general contractor failed to pay the supplier for all the materials, which led to several legal claims. The supplier filed a materialman’s lien under the Georgia’s Mechanics and Materialmen’s Lien Law against the real property where the project was located, sued the general contractor and loan guarantor for breach of contract, and sued the property owner on the basis of a materialman’s lien against the property.
Supplier Prevails Against GC and Guarantor: The plaintiff won a summary judgment against the general contractor and guarantor for payment which included prejudgment interest, and attorney fees pursuant to the building supply company’s credit application’s terms and conditions.
Supplier Prevails Against Project Owner: The trial court also ruled in favor of the plaintiff in the claim against the owner, granting summary judgment for the materialman’s lien and also making an award for the supplier’s prejudgment interest.
Project Owner’s Appeal: The owner appealed the lower court’s decision, contending that factual questions remained regarding the amount of the materialman’s lien sought. If there is a genuine issue of material fact, such as the actual amount owed on a lien, summary judgment is improper. The appeals court agreed with the owner that there was an unanswered question of fact, finding that the plaintiff has the burden of proving the lien amount due at the trial court level. The court also noted that a materialman’s lien against the property owner will fail if the owner can show that payments were properly made and applied to the payment of the plaintiff for the labor and materials at issue. The appeals court also reversed the lower court’s award of prejudgment interest, which may not be claimed if the lien amount is not fixed and agreed upon, and attorney fees, which are not lienable items under Georgia law.
Practical Tips For Suppliers and Other Georgia Lien Claimants:
1. File a Timely Lien: If you as a supplier have not been paid by the party with whom you have a contract, you may place a materialman’s lien against the real property owner if your labor and materials improved that property. This does not require you to have a contractual or any other relationship with the property owner, who has benefited from your materials and work. Remember that all Georgia construction liens must be filed within 90 days of the last day in which the lien claimant actually worked on or supplied to the project or within 60 days of the date of the lien waiver–whichever deadline is shorter!
2. Document and Prove the Amount Claimed in the Materialmen’s Lien: If you as a supplier have a valid materialman’s lien against improved property, the amount of the lien must be fixed by agreement or proven in court.
3. Property Owners Should Track Their Payments: If you are a property owner being sued to enforce a materialman’s lien against your improved property, try to show that you made payments properly to the contractor for the payment of third party supplier’s labor and materials.
4. Interest and Attorneys Fees are Not Includable in Lien Amount: If you are a defendant in a materialman’s lien suit, note that attorney fees and prejudgment interest are not lienable items under the Georgia lien statutes.
by Mark A. Cobb
Isn’t it generally true that the best time to ask for something from someone is when they want something from you in return. It doesn’t matter whether it’s your spouse, your neighbor or your boss, if they need a favor from you, they are more likely to grant your favor in return. Thus, the best time to get pertinent information from a customer is when they want to purchase something on credit from you! And yes, by utilizing materialman’s liens and payment bonds laws you can substantially reduce your exposure. However, getting the right information in the beginning can help you immeasurably.
Look at it this way, when a potential customer contacts you and requests to purchase materials for use on a construction project, use this opportunity to get information which will make collection faster and easier in case you have future payment issues with this customer. Similarly, when an existing customer contacts you and requests an increase in their credit line, guess what? It’s another opportunity to (i) add useful information to their credit file and (ii) update the borrower’s information in their file.
As the (recent) recession has taught us so well, even the best customers can become credit risks. In this day-and-age, even one bad construction project can topple an otherwise good company.
What Kind of Credit Information Should A Material Supply Company (or Equipment Rental Company) Request:
Written Credit Application: Credit Applications are an easy and ideal way to collect all of the information used to determine a customer’s credit worthiness to your firm and to assist you in pursuing bad-debt. Standard forms can be uploaded to your company’s website which allow prospective purchasers to easily assess your forms. Although there are some very good, useful template credit application forms available, it is worth the investment to use the template as a starting point–use it to build an application based upon (i) your specific industry and (ii) real-life situations your company has experienced. Also, don’t let the form become static; instead, mend the form every time you think about or learn about additional, useful information.
Yes, you are likely already asking the question “What Information is Important to Know to Determine Credit Worthiness?”, but you should also be asking the question, “What Information Will Help Us Collect Our Money If The Borrower Defaults?” Adding this perspective can make the difference between collecting your open accounts and forfeiting your money.
Since we are a law firm focusing on Georgia construction law, and more to the point Subcontractor Law, we regularly have to file, enforce and foreclose upon liens to get our client’s their recovery. A very common scenario exists where our client received a monetary judgment for the amount the are owed, but the judgment must be collected. Frequently, the first (and most useful) information comes from the judgment-debtor’s (your customer’s) application for credit. Consequently, we have seen countless credit applications, and we encourage that at a minimum your credit application includes the following:
- the Customer’s full, legal name (a step which is almost always omitted but very important is the credit analysis’ verification of the name with the Georgia Secretary of State’s business registration records);
- Entity type (corporation, LLC, partnership, sole proprietorship); if it is a partnership, follow-up with the customer prior to extending credit to get the names, addresses and social security numbers for EVERY partner;
- the Customer’s tax ID number (do not confuse this with the owner’s or guarantor’s social security number);
- the business owner(s) full name and Mailing address;
- the business owner(s) physical, Residential address; in Georgia, service of process is accomplished through the Sheriff or other court-approved process server physically providing service on the individual names in the lawsuit; thus, having (and confirming) the residential address can save a lot of time and money (this means street address only–not a post office box and, more importantly, not a fictitious business location with a mail-box drop);
- the business owner(s) Social security number (in addition to the business’s tax ID number);
- the owner(s) Spouse’s name and social security number;
- Current bank account information;
- require your customers to update their credit applications regularly to keep the information current; and
- make sure it is LEGIBLE! When it comes down to locating a customer, nothing is more frustrating than an illegible social security number!
Written Account Terms: Depending upon the nature of your agreement (such as open account or written contract), you should always have every customer sign an agreement of your written terms. Having your customer’s consent to your terms is invaluable to asking a court for recovery-in-full. For example, seeking attorney’s fees on collection matters can be much easier to get if your customer has agreed (in writing) to paying for your attorney’s fees. Please consider including the following terms on your contract or open account agreement:
- a Joint-check provision to allow you to request a Joint Check from the general contractor; if payment from a particular project is not flowing-down to you, this provision can give you some authority (and the GC some firmer ground) to circumvent your client and seek payment directly for the prime contractor; this can give you easier access to the project’s retainage;
- Jurisdiction and venue consents can save you money as it can allow your collection lawyer to file all suits in the same convenient location; this promotes lower fees and a more predictable (dare we say favorable?) court;
- jury trials can add expense and delay recovery; Waiver of jury trial can be an effective way to avoid these problems;
- include provisions that allow you to collect Interest, Attorney’s fees and collection costs;
- Liability for theft, inclement weather, of other loss to your materials on the jobsite; this provision clears up any gray area as to whom is responsible for your materials after delivery; and
- periodically have your customer update their consent to your terms (you don’t really want to try and enforce a provision signed in 1981!)
Personal Guarantees: Most customers are willing to provide personal guarantees prior to receiving the materials which you are able to provide them, but it’s almost impossible to obtain a PG after credit has been extended. Pursuant to Georgia’s Statute of Frauds, a personal guaranty MUST be in writing in order to be enforceable. Here are some ideas which you should consider adding to your PG:
- make sure your guarantee meets Current legal requirements to be an enforceable guarantee; during the recession there was a great deal of litigation surrounding PGs and your document should reflect some of the changes in the laws;
- although you don’t want to be onerous, there is no legal limit on how many personal guarantees you are allowed to require in order to extend credit;thus, it is OK to require More than one person to submit a guarantee; this is particularly helpful in situations where your customer is a partnership (get all of the partners to submit to a credit check and a PG) or where the owner of the business has moved his or her assets into a spouse’s name to avoid collection of their debts;
- obtain the Guarantor’s social security number, mailing address and physical, residential address; and, like the credit app recommendation above, verify that this information is legible;
- get a copy of the guarantor(s) Drivers license; this contains useful information including (i) driver’s license number, an example signature, and a photograph (we shouldn’t have to remind you, but check to make certain the photo ID and signature match with your account app, contract terms, PG, etc.;
- get the personal guarantee Witnessed by someone who can later testify that the guarantee personally signed it;
- UPDATE the guarantees and re-verify the credit worthiness of your personal guarantees.
Use Georgia’s Statutory Construction Notice Scheme for your Benefit: As you likely know, third-tier subcontractors (which are generally sub-subcontractors and material suppliers to subcontractors) must comply with Georgia’s statutory construction notice scheme; although it may seem cumbersome because it may require you to send notices to the project owner and the general contractor, there are advantages to compliance; when you supply at a third tier level, it is important to meet all of your notice obligations; although your customer may not have all of the necessary information, you should try to get the following from them before you supply to them (or extend them credit):
- Keep in mind that in order to file a valid materialmen’s lien or payment bond claim, you must demonstrate that the materials, labor or services which you provided were used on the project against which you claim a lien (or payment bond claim); thus, you must get the information necessary for your construction notice compliance on each “purchase” or “rental”;
- You need to know the project’s name;
- the project’s location;
- the prime contractor’s name and address;
- the project owner’s name and address;
- your customer’s payment bond information (if applicable);
- the general contractor’s payment bond information (remember that payment bonds are required on most municipal, state and federal projects, but many private construction projects are ALSO covered by a payment bond);
- a copy of the Notice of Commencement.
Don’t Forget! In order to take advantage of some of the useful collection techniques permitted by your industry, you must make certain that your internal accounting procedures comply:
- keep track of supplies by customer and project
- apply payments properly
- have a calendaring system which alerts you to deadlines
by Mark A. Cobb
It doesn’t matter whether you are a material supplier delivering products to a subcontractor, a subcontractor performing work directly for a GC, or a GC building a structure for an owner, you expect to be paid for the labor, materials, and equipment which you provided. In fact, without payment, it could send your business plummeting downward if you cannot pay your own bills.
We highly recommend that before entering into any construction contract, you perform proper due diligence and protect yourself as much as possible. No matter how thorough you are, however, as the project continues, one of the parties involved with the project might experience a material change in their business or their cash-flow which can directly impact you and make recovery of the money you are owed more difficult. Thus, you want to keep evaluating each customer’s credit-worthiness.
For over 20 years, clients have shared with us some of the early-warning signs (which they largely ignored) which indicated that their customer might be a payment risk after the initial credit-check, and we thought our readers might like to see this list (and add to it themselves!) The following is a checklist of situations which may indicate that you are working with a potentially distressed party:
1. A change in your customer’s bank account may indicate many things including accounts closed, banking problems, a garnishment, etc.
2. Your customer pays you from different bank accounts (unless its accounts are separated by project, escrow, etc.); this is unprofessional and may indicate spreading out their assets to avoid garnishment or to rely upon the float by the banks.
3. Significant fluctuations in your customer’s inventory may indicate volatile business practices, changes in credit with other vendors, etc.
4. An unusually large order may indicate that the customer has undertaken a project larger than its capabilities.
5. Unexpected / unplanned growth of your customer’s business; great businesses maintain and update business plans; unplanned growth can cripple a business, overextend its employees and assets, and cause the business to fail to meet its new obligations.
6. High debt to equity ratio; customers in this position are a credit risk.
7. When your customer loses a major job or client; if too much business comes from one relationship, then the loss of that business can be devastating.
8. A generally disorganized approach to its business, accounts payable, accounts receivable is scary; likely, that business does not understand the extent of their liabilities, realistic expectations of income, etc. and that could put you in a dangerous position if you need to implement collection procedures.
9. Rumors; my Mother always told me that “where there is smoke, there is fire.”
10. If you hear comments from other construction industry professionals that your customer isn’t charging enough, then it might indicate that your customer is trying to get business on any terms in order to improve its panic for cash-flow; inevitably, they will run out of money and someone (hopefully not you!) will be left holding the bag.
11. Requests to extend payment terms may indicate that your customer needs more time to “shuffle” its assets to pay you.
12. Liens (including state and federal tax liens which are all public record); a 10-second check on-line can indicate the fiscal health of your customers.
13. Slow payments: creditors and debtors typically establish a billing and payment practice over time, when they deviate, it may indicate a potential problem.
14. Employee layoffs; if possible, visit your customer at their office, a reduction in their workforce could hint of problems to come.
15. Key employee changes dramatically alter the bottom-line and the business practices; when changes in management occur, they may use other vendors (forgetting to pay you), may emphasis other payment policies, could indicate that top management was receiving their paychecks or benefits.
16. Family and health issues related to owner or key employee (or their families) such as divorce, death or serious illness can greatly impact a business relationship.
17. Excessive downtime may indicate unexpected reduction in your customer’s revenues.
18. You customer’s business is for sale or sold; there may be ways for a new purchaser to avoid debt incurred prior to the sale; it can also indicate financial or industry-specific problems; also, it may result in a new corporate atmosphere which may make collection more difficult; frequently, the new owners tell you the former owner is responsible for the debt, but the old owner tells you that the new owner assumed the obligations.
19. You receive excessive inquiries for credit references for your customer; this might be a customer who is trying to expand their credit in order to generate funds to pays others (“borrow-from-Peter-to-pay-Paul syndrome).
20. Excuses for nonpayment or slow payment (lost invoices, “check is in the mail”, skipped invoices, unsigned checks, NSF checks, “no one is available to sign the check”, etc.); excuses are never a good sign.
Good credit management means vigilance. Do not agree to extend credit, perform work, or supply materials unequivocally on a long-term project without some follow-up to see if your customer’s financial position has changed. If it changes, and if you react promptly enough, it will make recovery of your money easier and reduce your exposure. Fortunately, you have several options including filing a preliminary lien, obtaining personal guarantees, and requiring stricter terms. In next week’s blog we will explore some of the options you may want to consider when you see indicators that a customer may become a credit-risk to you.
If you have other early-warning signs that alert you to potential payment issues, please leave a comment below.
by Mark A. Cobb
I just read a very insightful and accurate description of what it means to be a contractor:
We design and construct buildings but the reality is we are risk managers. Virtually anyone could design or construct a project if it had no risk. The reality is that owners hire and pay “experienced” designers and contractors to manage project risk. We are risk managers and the better we manage, the better our profit and final product. [emphasis in original].
This description of a contractor’s responsibilities comes from BIM and Virtual Construction: Where is the Money by Damon Socka and Jennifer Lanzetti recently published in Constructor: The Magazine of the Associated General Contractors of America (July / August 2014). This definition reminds us of the realities of working in the construction industry in the 21st century.
As a law firm committed solely to issues related to construction law, we have a very diverse client base. Newer clients are frequently caught off-guard when risk stares them squarely in the face–and that’s why they call us for the first time. When we meet these new owners and project managers, they often comment about the volume of paperwork–they thought that entering the field of construction work would let them spend a lot of time outside working with their hands; instead, they find themselves poring over contracts, drafting emails and letters to address problems, delays or weather-related re-scheduling issues.
Although a contractor’s sole role may not be risk manger, it is a significant part of every project manger’s and every contractor’s (or subcontractor’s) business. The finest of these are able to avoid most of the risks or greatly minimize the risks; when this isn’t possible, then owners, contractors and subcontractor’s engage in a dance to transfer risk from themselves to another party. Here is a short list of ideas that help eliminate, reduce or transfer risk:
- work only with responsible owners
- verify owner’s credit worthiness
- require payment bonds and/or performance bonds (it shows the credit worthiness of your subcontractors)
- build relationships (with GC’s, subcontractors, sureties, banks, project developers, construction lawyers)
- make honesty a hallmark of your work
- written construction contracts should spell out the goals, the responsibilities, the payment, and have a dispute resolution plan waiting in the wings in case it is needed
- use the best subcontractors and suppliers (which may not be the lowest bid)
- keep detailed, daily logs
- run efficient but meaningful weekly meetings
- document subcontractor issues in writing, with photos, etc.
- know your construction contract’s deadlines and communication methods for problems
- take responsibility
- stay on top of payment issues and, if necessary, file materialmen’s liens or make payment bond claims
- if materials are difficult to source, make certain that a back-up source is available
- budget properly for time and money
- pay your bills on time (and pay your subcontractors & suppliers promptly)
- don’t sweat the little stuff
There are many different ways to avoid construction risks or eliminate them completely, please share your favorite tips for reducing risks on construction projects with us by leaving a comment below.
In the big, legal field of “commercial collections” there is seldom good news. Even rarer, there is seldom a big benefit to help you get paid. Commercial collections for the construction industry, however, is different–there is some good news and there are some BIG, effective strategies to help you get paid . . . .
Introducing the Materialmen’s Lien (sometimes referred to as construction, subcontractor, contractor or mechanics lien) and/or the Payment Bond Claim!
What are the benefits to filing a Materialmen’s Lien in Georgia and/or making a claim against a Payment Bond? Although liens and payment bonds are completely separate animals with their own advantages and disadvantages, they share a BIG ADVANTAGE: for the subcontractor or the material supplier it is like getting a free GUARANTOR to promise to pay you the money you are owed after the money is owed! This is unthinkable in almost any other collection area. Look at this example:
OWNER hires ABC CONTRACTOR to build something; ABC CONTRACTOR, in turn, hires XYZ SUBCONTRACTOR to perform all of the electrical work on the project. Assuming that XYZ SUBCONTRACTOR fully performed under its contract, but ABC CONTRACTOR breaches its contract with XYZ SUBCONTRACTOR by failing to pay XYZ SUBCONTRACTOR, then, pursuant to standard contract theory (i.e., commercial collections), SYZ SUBCONTRACTOR may pursue collection of the debt from ABC CONTRACTOR (and only from ABC CONTRACTOR). But in the niche area of construction collection, in addition to seeking payment from the contractor, XYZ SUBCONTRACTOR may be able to file either a lien or make a payment bond claim in which case, XYZ SUBCONTRACTOR can look to either OWNER (in the case of a lien) and/or SURETY (in the case of a payment bond). Imagine someone owes you some money, and then after the debt becomes due, you find that a third-party may also be responsible for paying you.
Practical Tip: If you are a supplier or subcontractor who wants to improve your recovery of accounts receivables (AR), then, before you begin work or begin providing materials to the jobsite, try to obtain a personal guarantee from your customer’s owner. That way, if you are not paid, you may be able to seek recovery from (i) your customer such as ABC CONTRACTOR, (ii) your customer’s individual owner, (iii) by using a mechanics liens, the OWNER, and (iv) if there is a payment bond covering the project, then the SURETY. Four potential debtors/guarantors will significantly increase your likelihood of recovery.
Is It as Simple as It Seems? Unfortunately, nothing is entirely simple, but filing a claim of lien in Georgia and making payment bond claims are typically not too difficult nor too expensive. Of course, the lien claimant or the bond claimant must meet several obligations and deadlines in order to pursue their lien rights but most “good” subcontractors and suppliers do this automatically, and less “professional” subcontractors and suppliers, admittedly, seem to have more difficulties. We hope to address some of these issues in future blog posts as well.
What is the Difference Between a Claim of Lien and a Payment Bond Claim? On all privately-owned construction projects in Georgia, those who supply labor, services or materials have basic rights if they do not receive timely payment. On all public works projects (government-owned construction projects) of a certain size in Georgia, those who supply labor, services or materials have rights against the payment bonds. In addition, some private projects are also covered by Payment Bonds in which case, an unpaid subcontractor or supplier may file a construction lien and, concurrently, file a claim against the payment bond (which really increases the ability to recover your AR).
How Do I File a Construction Lien in Georgia? As mentioned briefly above, lien and bond claimants must meet various requirements in order to file a lien. Thus, it is vital to select a Georgia construction lawyer to help you analyze your specific matter and advise you on your collection options. It is important to know that lien and bond claims must be made within 90 days of the last day in which you worked or supplied materials on the project. (It could be a shorter period if you signed a statutorily authorized lien waiver).
It’s Up to You if you Want to Collect Your Money: If you are looking for a construction lawyer to help you file a materialmen’s lien (or make a claim against a payment bond) anywhere within the State of Georgia, please click here to contact us today.
It’s not too late! Although over 325 construction professionals have already signed up to attend, the AGC Georgia (the Associated General Contractors of Georgia) still has space for you to participate in its inaugural Construction Professionals Conference & Marketplace.
With over forty learning sessions, the event is divided into four-tracks catering to the construction industry:
- Executive Operations (including contracts, liens, payment bonds, leadership and best practices for industry executives, owners and leaders)
- Human Resources (including employee management and legal compliance for your HR department)
- Safety (including jobsite leaders and company-wide safety issues for every part of your business), and
- Technology (including BIM, construction apps, deployment, managements and Bluebeam)
Mark’s lecture is part of the Executive Operations track which focuses on current lien and bond laws, best practices, and proven leadership strategies from an owner’s/executive’s point of view.
Specifically, Mark’ program, entitled Best Practices for Contractor Survival, will include a combination of current issues, practical tips, and lessons learned in several areas of construction law including contract negotiation and drafting, Georgia’s lien waiver laws, preparing and filing mechanics and materialmen’s liens in Georgia, construction project insurance tips, registration of foreign subcontractors, and project management. Learn practical tips and on-the-ground knowledge to streamline and protect your interests. But, to learn more, you’ll have to register for the symposium.
See below for registration information:
Construction Seminar: AGC Georgia’s Construction Professionals Conference and Marketplace
Date: Wednesday, April 23, 2014
Place: Georgia International Convention Center, College Park
- Over 40 learning sessions on Safety, Executive Operations, Technology and HR
- Marketplace with 50 exhibitors
- Over 300 attendees
- Presentation of Ron Amerson Supervisor Safety Awards
- Keynote presentation – Social Media Overload
Click here to learn more and to register! We look forward to seeing you.
by Mark A. Cobb
Welcome to the new year! It’s January and that means there are new-years resolutions being made in great abundance. Self-improvement is always a good idea, but January can also be used to break bad business habits and replace them with better practices. Thus, we hereby offers our New Year’s Resolutions for the construction industry:
- RESOLVE to have your construction contracts reviewed and revised to improve their enforceability, to properly shift risks, and better define a project’s scope
- Georgia General Contractors should RESOLVE to file proper Notices of Commencement on every construction project
- Third-tier subcontractors and suppliers should RESOLVE to timely send Notices to Contractors and Notices to Owners (NTOs)
- RESOLVE to use only Georgia’s statutory Interim Lien Waiver form and Final Lien Waiver form (they waive payment bond claims too!)
- RESOLVE to remember that if you wait more than 60 days from the date of a Georgia lien waiver, the lien waiver becomes unconditional which means that you cannot recover the money you are owed
- RESOLVE to work harder as today’s construction market place requires the best of each and every individual
- RESOLVE to give your construction attorney time to prepare and file your Georgia mechanics and materialmen’s liens
- Suppliers and materialmen should RESOLVE to update their credit applications and obtain more information which is useful to judgment collection
- Non-resident contractors working in Georgia should RESOLVE to register with the Georgia Department of Revenue and obtain their sales tax bond
- RESOLVE to purchase (and maintain!) all pertinent types of insurance including workers’ comp, general liability, an umbrella policy, automobile insurance, etc.
- RESOLVE to address issues on construction projects as soon as you become aware of them rather than letting a small issue snowball into a larger problem
- RESOLVE to pay your bills on time
- RESOLVE to submit accurate, signed pay apps
- RESOLVE to treat your employees and subordinates (well, everyone) the way that you want to be treated
- RESOLVE to implement (and maintain!) better bookkeeping & record keeping methods
- For plumbers (others?), RESOLVE to cover-up that plumber’s butt
- RESOLVE to implement technology to lower your cost and improve your efficiency
- RESOLVE to keep signed, daily construction logs
- RESOLVE to know your rights as a prime contractor, a specialty subcontractor, or as a material supplier
- Contractors and specialty sub-contractors should RESOLVE to promptly pay their subcontractors and suppliers after they receive payment
- RESOLVE to adopt a policy of integrity for every aspect of your business
- RESOLVE to become more active in any number of great contractor groups such as AGC (Associated General Contractors), ASA (American Subcontractors Association), or CSA (Construction Suppliers Association)
- RESOLVE to honor your business contracts
- RESOLVE to stop procrastinating
- RESOLVE to constantly strive to be your best
- RESOLVE to take a vacation and relax
- RESOLVE to improve the professionalism of the construction industry