We are a general contractor. We are always good about paying out subcontractors in a timely manner once we have been paid by the client. However in the past and just recently, we have had issues with subcontractors not paying their subs/suppliers (2nd tier). What can we do as a general contractor to ensure that that 2nd tier is getting paid? In this recent situation we have paid our subcontractor all of their contract, minus a small portion of retainage. We just received notice from a 2nd tier sub that they are owed a significant amount of money above and beyond the retainage portion we still owe to our sub. It is at the 120 day mark, and they will be filing a lien. Do we need to pay this 2nd tier sub? What can we do going forward to prevent this from happening? Thank you.
One of the best ways to make sure that a subcontractor is paying their subs and suppliers is to require waivers from the full payment chain on every progress payment. If the sub has to provide waivers from their subs and suppliers, then it should be easier to identify issues since those parties would be more hesitant to provide waivers when their prior invoices or pay applications haven't been paid. Further discussion here: How To Handle Requesting & Tracking Lien Waivers.
Another useful step could be to require direct subs to provide a sworn statement from the sub stating that they have already paid or will use the payment they're receiving to pay their subs and suppliers. The additional step of promising that others have been paid or will immediately be paid may deter the sub from failing to pay their subs and suppliers.
Additionally, calling and checking in with the sub-subcontractors and suppliers to make sure they've been receiving progress payments could be useful. Certainly, the additional legwork isn't ideal - but it will help to avoid issues.
Lastly, notifying the sub of Minnesota's construction trust fund statutes and threatening to make legal claims against the sub could help to remind them the issue is their problem, too. For more discussion on MN's trust fund statutes, slide 21 of this presentation quickly covers them as well as this Levelset blog post: (1) Construction Trust Funds | Clark Hill ; and (2) Construction Trust Fund Statutes, Guide & FAQs.
Finally, regarding payment to sub-subs or suppliers: Ultimately, it probably just depends. If a subcontractor was paid and took off with the money earmarked for their sub-subs and suppliers, that subcontractor is still the one responsible for payment. But, the sub-subs or suppliers may well be entitled to lien rights, and it makes sense that a GC might consider paying them to avoid that headache (and then go after their subcontractor to be made whole).
Note, however, that MN is generally considered an "unpaid balance" state which may limit claimants' ability to file liens when others have received full payment on the job. So, for ultimate clarity, it'd probably be wise to consult with a MN construction lawyer to best understand the situation and potential paths forward. You can begin the search for the right lawyer here, if necessary: Top Minnesota Construction Lawyers.