by Mark A. Cobb
Often, we develop blog articles based upon recent client inquiries, and lately, we have had the same issue arise repeatedly–how should a contractor deal with discounts!
Discounts can be a great way to encourage business, they can be a great way to reward your best customers, and they can be a great way to pass along savings to others. However, don’t let your discounts jeopardize your collection efforts against your non-paying customer. We see it time-after-time: a contractor begins working on a project, and the project owner is paying his bills; as the project progresses, a congenial relationship develops between the contractor and the owner. The owner asks for a small change or extra “favor”; the contractor genuinely doesn’t mind and says that he will be glad to do it–and not charge anything. The favors or small changes add up over time; then, towards the end of the project, there is a dispute over the costs. The contractor contacts his attorney to help him collect his money, and he asks his attorney, “Can I recover payment for the free or reduced rate work that I performed.”
The answer to that question is grounded on how the discount was offered and/or invoiced.
As you likely know, if you are a contractor or subcontractor who hasn’t received payment, then you should consider filing a materialmen’s lien or a construction lien against the project. In many situations, this small step can help you in the following ways;
- increase the amount of money you recover;
- reduce the amount of time before you receive payment; and
- may provide you with an additional source (the owner) from which to seek payment.
Georgia’s lien laws are very specific–a Claim of Lien for unpaid work as a contractor, subcontractor or material supplier must be filed within 90 days of the last day in which the lien claimant actually worked on the project or delivered materials to the project (be careful, a valid Georgia lien waiver can reduce this 90-day time period). Furthermore, after the deadline to file the lien has run, then the lien cannot be increased; thus, it is very important that the Claim of Lien include all lienable amounts.
Why is it Important to Include All Lienable Amounts in a Materialmen’s Lien?
There are several reasons why all lienable amounts should be included in your original Claim of Lien including the following:
1. Even if your lien has been filed timely, the amount you claim you are owed cannot be increased after you have been off the job more than 90 days; thus, if you rely upon enforcing your lien to collect your lost revenues, then your claim (and, consequently, your recovery) will be limited to the amount claimed in your construction lien.
2. Frequently, construction claims are negotiated; as a rule in negotiation, it is generally wise to put forth all of the legitimate claims up front; then you may negotiate down in order to amicably resolve the situation. Thus, if you omit a part of your claim, your negotiating power is reduced accordingly.
How to Handle Discounts:
Both of our recent conversations have been with professional construction remodellers/remediation specialists. When we discuss the amount of their potential claims, both clients said, “Well, I usually charge higher for the work, but I gave this client a discount.” One client even said, “Well, I did a lot of that work for free!”
WHY Did he do this?
For hypothetical purposes, let’s assume that–had no work been done for free or a discounted amount–a contractor is owed $100K on a project; let’s also assume that throughout the process, our client had been willing to discount or give-away $15K. If we are then engaged to prepare and file the lien for the full $100K, then when the settlement negotiations begin, we can “start” at $85K, and our client may be able to recover the full amount it actually wanted. If, however, the discounts/free labor was given away before the contractor involves a law firm, then the maximum amount the Claim of Lien can be is $85K. If, through negotiation, the claim can resolved for a 15% discount (the same as the former example), then the Lien Claimant will receive $72,250.00 which, obviously, is less.
Is there a Better Way for a Contractor to Offer a Discount?
Professional contractors can still take advantage of the benefits of offering discounts. One great way is to offer a discount for prompt payment of your invoice–perhaps 7 days from the date of the invoice. If you choose to do this, make sure that your invoice includes language that clearly shows the discount is only valid for that 7-day period after which your customer will be responsible for the full amount.
If you provide free work to a customer, we suggest that you still itemize the work, the amount that it should have cost, and place the phrase “Amount Reduced” or “FREE”; that way, there is a record of the actual work you performed. Furthermore, if you end up filing a materialmen’s lien and working towards settlement of the amount you are owed, opposing counsel, an arbitrator, mediator, or even a judge is more likely to look favorably upon you if your invoices reflect the actual work done.