If you’ve worked in the construction industry at all, you’re no stranger to slow payments. This unfortunate aspect of the business can drain motivation and resources quickly. At some point, you may be thinking to yourself, “Should I just walk off the job?”
But can you even do that? Or better yet, should you do that? A contractor might be entitled to walk off the job if they’re going unpaid, but it typically isn’t the best option to compel payment.
Do You Have the Right to Stop Work if You’re Going Unpaid?
If you aren’t getting paid on a construction project, you will generally have the right to suspend your performance. The right to stop or suspend work might be established in the contract. But, even if it isn’t, contractors and subs may still be able to suspend performance under general contract principles.
At the same time, deciding to stop or suspend work could actually make matters worse. In some situations, even where payment has been coming unreasonably slow, the decision to suspend work could actually create liability for a contractor or sub.
In most payment disputes, the first step should be to try and talk out the issue with the parties involved. If that doesn’t work, it might be time to take a second look at the contract.
Right to Stop Work Provisions
Many construction contracts will include some form of “stop work” provisions. These are incredibly useful because they inform all parties about the consequences for non-payment or slow payment. A right to stop work provision will set out the timeline and/or procedure that must be followed to validly stop work. A notice requirement and an opportunity to make payment are relatively standard in these types of clauses.
Additionally, well-drafted clauses will also address how to suspend work. Does equipment stay on site while the issue is resolved? Does it require full demobilization of your workforce? Who’s responsible for delay damages? Knowing the answers to these questions could be the difference between proper suspension of work and accidentally breaching the contract.
If the Contract is Silent, Be Wary of Breach
If the contract does not contain a stop work provision, then the ability to suspend work will be governed by general contract law. That doesn’t mean an unpaid contractor or sub won’t be able to stop their work – it just means there are some extra things to keep in mind. Contractors will need to make sure they have the right to stop work, otherwise, they may breach the contract themselves by stopping work.
Lack of consideration in a contract (i.e., payment) can be considered a material breach of contract under certain circumstances. When that’s the case, a failure to pay could give an unpaid party the green light for suspending work. The real issue here is determining whether the breach is considered “material” or not. Essentially, for non-payment to be classified as a material breach, it must “substantially deprive the party of the benefits of the contract.” If a breach is not considered “material”, then the decision to suspend work might actually create liability.
When determining whether a breach has occurred, a court would take a number of factors into account. This includes the extent to which the contractor was deprived of their consideration (payment), the likelihood of payment to cure the default, evidence of bad faith, and so on. While the vast majority of construction payment disputes don’t make it to the courtroom, it’s still a good idea to operate as if a court will scrutinize the decision to stop work. That way, if a legal dispute does arise, unpaid parties can rest assured that they’ve operated by the book.
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Remember: Payment Problems are Caused by Poor Communication, not Ill Will
While it’s no secret that getting paid in construction can take a very long time (too long!), it’s often the case that the cause of the delay isn’t any ill will on the part of anyone connected to the job. No, more often than not, payment delays are caused by a lack of collaboration that affects everything from the timing of payments, and even to who should be receiving the payments.
A 2015 survey by the NAHB, showed that it takes about 22 subcontractors to build the average residential house. And if you think that’s a big number, just think about the typical, large commercial project! Often times, the top half of the payment chain (see illustration, right) may not know who’s on the project and vice versa or may be prioritizing payment to the lower half. No, as we’ve written about before, the key to getting paid faster is more transparency, greater visibility, and better communication.
And besides, when a contractor or supplier threatens to leave the job site (or follows through on the threat) it can cause multiple problems, not only for themselves, but also for all of the other participants on the project.
Walking Off the Job can Cause Collateral Damage
This “collateral damage” can include:
1. Delaying the Project
If you walk off a job, there’s a good chance that your actions are going to adversely affect some of the other project participants. Is that really fair to do, considering that you may not have done all that you could have to prevent winding up in this situation?
2. Burning Bridges
Similar to number 1 above, is it really smart to run the risk of irreparably damaging a business relationship before you’ve taken every step you can to proactively rectify the situation. Even if the general contractor has ignored repeated requests for payment by phone, fax, or email, it’s still a better method to put the hiring party on notice sending a Notice of Intent to Lien instead of just walking off the job.
3. Does Walking Away Even Work?
There’s no guarantee that walking off the job will result in receiving payment, so why risk it when there are other options?
Better Alternatives to Walking Off the Job
Every situation is different, and so is every construction business. So, depending on the business and the circumstances, there could be any number of considerations that will play into the decision to suspend work. Still, the following are some things to consider before stopping work.
Send Notices on Every Job
Sending preliminary notices on all jobs ensures that the parties up the chain know what work was performed, who performed the work, and for what amount. Not only that, but it puts the party’s payment in line because general contractors are used to receiving preliminary notices as a general business practice in order to protect lien rights. For example, Levelset’s customer data shows that receiving preliminary notices was helpful to other parties on a project 93% of the time.
Send Conditional Lien Waivers With Every Pay App / Invoice
By sending a conditional lien waiver with every pay app or invoice, it alleviates some of the risk of double payment for the general contractor and other parties at the top of the project. Reducing this risk usually means that you’ll get paid faster.
Sending conditional waivers essentially states that, if paid, then lien rights will be waived for that payment. This ensures that the project can move forward and on schedule if payment is issued. This makes life easier for top-of-chain parties because they won’t need to chase down lien waivers, and it ensures that unnecessary liens won’t be filed.
When Problems Arise, Communicate First!
A crucial element to any successful build is communication. If you are experiencing late payments, contact the prime contractor, the owner, and/or the project manager before taking action. Let them know what work has been completed, which payment applications have been submitted, and try to establish a way to cooperate and keep work on track. The simple act of making a call, writing an email, or providing a more-formal notice (even if not required) is a great way to keep communication channels open.
Depending on the size of the project, there can be any number of factors or parties that are affecting the payment chain. Effective communication can help you get seen on a project, and it increases the chances of your problem getting the attention it deserves.
Read the Contract
Reading the contract to clarify payment terms and to determine what actions are available is also a solid step. There may be payment provisions making the delay or withholding of payment technically acceptable. What’s more, as discussed above, the contract may also prescribe actions like suspending work or sending a notice when payment terms are breached. By understanding what’s required under the contract, an unpaid party can diminish their risk of taking on unnecessary liability.
For subcontractors and suppliers, one important thing to look out for is a pay-when-paid provision. Late payments aren’t always the customer’s fault. It’s entirely possible that they haven’t been paid yet! If your contract includes a pay-when-paid provision, that means payment is dependent on your customer receiving payment first. If this is the case, then stopping work might not be an option. A pay-when-paid provision could be a valid defense against a breach of contract claim based on non-payment.
Know Your Rights (and Leverage Them if Necessary)
Is the right to file a mechanics lien or a bond claim on the table? Could merely threatening to use those right help speed up payment? Mechanics liens and bond claims are incredibly powerful tools, but they’re also the nuclear options. Sending warnings like a Notice of Intent to Lien or a Notice of Intent to Make a Bond Claim can get the point across without putting the project (or relationships) in jeopardy. But, if push comes to shove, making a claim might be a better option to recover payment than simply walking away from a job.
Also, be sure to know your state’s prompt payment laws. Most states have their own regulations concerning the allowable timeframe for construction payments. These laws may apply to owners, prime contractors, and subs. What’s more, when prompt payment laws aren’t followed, financial penalties could come into play for the party who failed to make payment. By warning of these penalties, and by showing that a claim will be made if payment doesn’t come, claimants can work toward payment without actually having to pursue a claim. Plus, if that’s ineffective, actually going through with a prompt payment claim is always an option.
The Decision to Walk Off the Job Should be a Calm, Calculated One
Stopping work for non-payment should be a last resort option! Walking off a job may seem like a great idea, but contractors should proceed with caution – and it’s never a good idea to make a decision in the heat of the moment. The right to stop work may well exist when payments aren’t coming, but the decision to walk off a job should be a calm, calculated one. Otherwise, the suspension of work could actually increase potential liability and financial risks.