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What are legal implications of inflating contract amount if amound due is correct?

None of our general contractors are happy with property owners knowing actual contract amount and being able to calculate GC's markup. We would like to be able to say the contract value was double actual value to avoid losing our GC customers. For example, we charge the GC $2600 for a job, GC invoices the customer for $5000 for the work we did. Can our preliminary notice say that the contract amount is $5000, but amount due is only $2600? Or would this invalidate any future lien action?

1 reply

Jul 13, 2018

That's a good question - and it's one we get fairly often at the Construction Legal Center. First, this issue pops up across a number of different states for a number of different notices. The bottom line is that everything is marked up so that work is profitable. Otherwise, what would be the point of doing any work? Owners and customers are often more understanding than expected on this front. Inflating costs in a notice might not cause great amounts of harm, but the best practice is always to be truthful in all communications. For those who are eyeing marking up amounts on their notices, it's worth taking a look at the nature of preliminary notices and mechanics liens. For a mechanics lien, there is a lot of risk involved with inflating a lien amount. If a lien claim contains an amount that is excessive, a lien could be deemed fraudulent or invalid and penalties could come into play. When a preliminary notice contains an inflated amount, the same concerns aren't really present - but an estimate should still be made in good faith. A preliminary notice, at least in Arizona, doesn't really require action on the owner or GC's part - and sending notice doesn't create a claim for payment. Rather, it keeps lien rights alive and preserves the possibility of some later claim. Thus, if a preliminary notice contains some amount and a lien is later filed for some lesser amount - the fears involved with included an inflated amount in a lien claim shouldn't really be present. Of course, the requirements for an Arizona preliminary notice should be followed. Under ARS § 33-992.01(C)(1), the following must be included: "A general description of the labor, professional services, materials, machinery, fixtures or tools furnished or to be furnished and an estimate of the total price thereof." There's a lot of flexility built into that requirement. Specifically, it does not require that an exact price be included. Rather, it contemplates an "estimate". Further, there's an argument that the phrase "total price thereof" can be read a few different ways. Certainly, it can be seen as the cost a claimant is charging for their work. But also, the "total price thereof" could be read as referring to the price that is being charged to the owner. Of course, the safest option is likely for a claimant to provide the amount they're billing for their work. But considering (1) that the requirement for the price of work provided is very flexible, and (2) that there is significantly less risk in sending a notice whose estimate is on the higher-end of things, a claimant might potentially include an amount higher than the exact price they anticipate at the outset of a job. It's ultimately a risky course of action, though. Of course, if a claimant decided to pursue including higher amounts on their notices, it would likely be very important to convey that to their general contractor prior to sending notice. Seeing such a high figure on a prelim could be jarring and could negatively affect relationships.

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