Free Webinar: Construction Attorney Guidance on Avoiding Payment Problems in California

A Roundtable Discussion on Preventative Protection for California Contractors and Suppliers

In California, legal challenges and payment disputes are common pain points for construction companies. But, with a little bit of proactive thinking you can get ahead of payment problems before they arise.

This roundtable discussion will feature California construction attorneys sharing their advice and solutions to head off payment problems in the construction industry.

What we’ll cover:

• Why payment problems are such an issue for California contractors and suppliers
• Proactive advice from construction attorneys on how to avoid payment problems
• Lawyers share their real world experiences preventing construction payment issues

Transcript

Seth Bloom (00:29):
All right. So we’ll let people, uh, come into the room right now. Welcome.

Speaker 2 (01:06):
[inaudible]

Cara Vallejo (01:10):
Give it about one more minute. I write in. Okay guys. Ready to get started. Sounds good. Well, first of all, thank you to everyone for joining us today on this webinar. Um, we’re going to be speaking on the, uh, with our panel of attorneys, um, with some guidance to avoid payment problems in California. Again, thank you all for coming. We’re so excited that you are here. Um, first we’re going to introduce today’s moderator and Mr. Seth bloom, take it away.

Seth Bloom (02:08):
Thank you for everyone that came out today. This is really exciting. We did a similar webinar to this just a few weeks ago, and there was tons of California questions. So we knew we had to get those answers. So we brought on two great California lawyers today, and I’d like to introduce them, Gary, if you want to change, Why don’t we put the lawyer? Uh, bio’s on,

Cara Vallejo (02:37):
Yeah, my apologies technical difficulty on my end. There we go.

Seth Bloom (02:41):
Okay. Today’s panelists and they’re not too far away from each other. It’s a Peter Ryan at Flores Ryan. He’s a construction attorney, uh, out of Pasadena and Peter Lindbergh at, uh Limberg and Maeser in Glendale. So they’re, uh, neighbors. Um, so we’re really, I really appreciate both of you having, uh, coming on today and doing this webinar and helping our customers, uh, solve some of the questions behind construction payment in California. So, uh, let’s take it away and get started with the webinar.

Peter Ryan (03:13):
Sounds good.

Seth Bloom (03:15):
Great. Okay. A round table topics, why getting paid is such an issue in the construction industry. Um, uh, number two, proactive steps to con contractors take to avoid payment problems and three success stories of construction companies that have kept non-payment issues at bay. So do we want to start tackling those kero? Uh, one by one with each attorney. Okay. Let’s do that. Um, like would say Peter, but which Pete wants to start

Peter Lindborg (03:49):
Federal, I’ll start a peer Ryan here. Thanks everybody for coming today. Um, so our first question here, why is getting paid such an issue? I think it really depends on, uh, the project, the primary reasons that, uh, payment becomes an issue. I think on large projects, especially for the smaller player, subcontractors material suppliers that getting paid is an issue because the multiple levels of bureaucracy and administration above those people. And also when there tends to be disputes between the general contractor, no owner, uh, everybody else gets caught up in those disputes, whether or not they, they did anything but perform their work. Um, with respect to smaller projects. What I see as the primary issue is, uh, basically everybody just trying to protect their business and their interests and their cashflow. Uh, I mean obviously the name of the game and Instructure 90 businesses to, to collect what you can collect and then pay out what you need to pay after everybody’s trying to meet that goal and then not fight. Uh, there ends up being friction where, uh, getting paid ends up being a problem, even if you’re performing what you agreed to perform.

Peter Ryan (05:07):
Yeah. Peter is absolutely right. And you combine that with the kind of the inherent nature of the beast. I mean, construction is a credit industry and at least on the typical project, quote, unquote, if everything works right, you mobilize on day one, send in your first invoice on day 30. And if you’re really, really lucky, you get paid on day 60. So you’re 60 days into this before you see dime one. And as everybody knows, you make your profit on the back end of the project. You’re anybody who’s in this business is whether you know it or not a lender

Seth Bloom (05:51):
I’m not on mute. I also just wanted to, I forgot to mention before anyone has any questions, please post them in the, or ask a question and we’ll get our lawyers to answer them, um, live, or we can wait till the end. We’ll have some Q and a time as well. All right. When, uh, should we go to the next slide?

Peter Ryan (06:12):
Let’s go to the next one.

Seth Bloom (06:14):
So let’s talk about some general steps to take, uh, to avoid payment problems.

Peter Ryan (06:21):
Um, yeah. From, from our point of view, the big steps are the, the planning that everybody does upfront. I mean, you, you, you plan a project before you hit a project. You don’t show up on day one and say, gosh, what am I going to do? Now? You have, you you’ve thought about how you’re going to execute the project before you show up. Well, you need to do the same thing on the administrative end. One of the things you need to do is think about what your contract documents provide. Okay. We have more than one client, uh, for whom we’ve drafted various form contracts for various situations. Am I uphill? Am I downhill? Am I the prime in Maya sub uh, et cetera, et cetera, et cetera. And when they’re required to use some, but start with somebody else’s form. And sometimes you are a lot of the times you are, they send it to us for, for, for a quick review.

Peter Ryan (07:23):
I mean, that’s the kind of stuff that the big boys do. In-house but most people don’t have in-house legal departments. So you, you kind of have that routine. The second routine is what are you doing on your administrative backend, your accounts receivable folks, do you have our routine set up where they send out the 20 day prelims as a matter of course, uh, do you have somebody monitoring payments for aging? Do you have a procedure in place for asserting your job rights, as well as your contract rights, things of that nature? Uh, you know, we understand, you know, and both Peter and I are, are in this business and serve this industry. So we’re fortunate enough to be able to understand a lot of what’s going on here. We understand you guys all like to build things, and we understand that you guys all hate paperwork. Uh, but paperwork is unfortunately, a lot of the times what gets you paid in this business? So you gotta, you gotta have somebody paying attention to the administrative side, cause that’s a lot of times where you fall down.

Peter Lindborg (08:36):
Uh, I would agree a hundred percent with Peter, um, clear contractual provisions when you’re providing the contract and understanding the contract. Even if you don’t provide it and making sure you follow those provisions, whatever the deal is, a secure payment, whatever the pay payment applications with fire, following that I think is one of the first steps to make sure that there’s not going to be a dispute. And then, yeah, the next thing, as far as your accounts receivable, making sure that if payment isn’t coming as expected, you are following up, uh, as soon as payment becomes overdue. So, uh, you’re aware if there is a problem that you’re aware of seems possible. Um, and another problem that I see it, I see a lot of contractors when things get more contentious, uh, they’re, they’re tempted to, especially if they’re still on the job, the, uh, the attempted to withhold their work or, or do something like that, uh, to, to use that as leverage, to get paid.

Peter Lindborg (09:37):
A lot of times the contract doesn’t allow for that and that can create liability in and of itself. So it actually creates, uh, a defense to payment instead of achieving what they’re trying to achieve with his tie to get paid. Uh, so I’m not understanding the contract and what your rights are, what kind of leverage you can assert and what you shouldn’t assert what’s going to cause you more problems, uh, then, uh, apply then serve to, uh, use leverage, uh, is important. Um, and then I guess the other thing is, uh, I mean, you want to be cooperative with, with your customer and, uh, if they’re having issues with whoever’s above them, they’re saying they’re waiting on the owner to get paid. That’s fine, but I’m you want to trust them cooperate, but you also want to be sure to protect your rights. So they may say, yeah, the owners still hasn’t paid us and that’s why we haven’t paid you.

Peter Lindborg (10:33):
But that doesn’t mean that I, you should sit back and just take their word for it. You should still do what you need to do as far as I’m, first of all, preliminary notice initially. And, uh, after that, uh, any lien demands or, uh, to extent you need to record a stop payment notice, or make a claim, everything that you need to do to protect your rights you should do. And that doesn’t necessarily mean that you’re being unreasonable or aggressive and you just have to frame it as, Hey, I, I need to protect my rights. I understand you’re having issues getting paid. We all need to get paid, but I’m going to do everything I can to protect my right to payment all the way through. So that way, uh, when, when everything falls into place and somebody needs to be paid, if they’re making choices where they’re going to pay, they’re going to pay the person that has done everything to protect their rights. That is the biggest they see as the biggest problem first. So that’s going to be paid.

Peter Ryan (11:30):
Yeah. Peter is, is absolutely right. And you know, we have, we have the fortune of being out here in Hollywood and the greatest line in American cinematic history is it’s not personal. It’s just business. Okay. So don’t, don’t be bashful about saying I have to do this because I’m not getting paid. People will understand that in that, uh, there have been, uh, a recent development in California law in a, uh, in the last couple of years, a couple of cases have come out, which have limited the applicability of what we used to call a pay when paid provision, um, in the old, old days, uh, con uh, construction contracts typically said that, uh, me receiving payment from my uphill party is an absolute precondition to me having to pay you those things got voided out about 25 years ago. Uh, then we went to a, uh, fairly expansive pay when paid, which was the, which was the standard, uh, in California for a long time, that basically said, I will pay you within a reasonable time.

Peter Ryan (12:48):
But if I have to chase the guy up he’ll for the next three years in order to get payment, that’s a reasonable time. The, uh, that is what it has been voided out in the last couple of years and in a couple of cases. So you need to, when you’re negotiating payment provisions, those old forms are going are, are, are, are, are going the way at the Buffalo here. And you need to, maybe for the first time in twenty-five years, actually really pay attention to what your payment provisions in the contract say. Those were things that people just used to glaze over. So that’s, that’s the newest safety tip here.

Seth Bloom (13:29):
No, we have a quiet room right now. So I’ll ask a quick question, but I mean, there are any like red flags or just any sort of patterns that a U2, both of you attorneys see on a regular basis when it looks like things are going downhill, or maybe some things that our customers out there should look out for

Peter Ryan (13:50):
Peter, you want to start?

Peter Lindborg (13:51):
Uh, yeah, sure. So, I mean, I guess that the biggest red flag that I see is, uh, I mean, especially on a project that has multiple subcontractors, it’s, it’s usually not just one person that’s not being paid. Uh, there, there ends up being payment disputes among the bunch of people and, uh, one of the best things to do. Usually you’re not going to be the first one. So I mean, talking to other people on the project about what’s going on, are there issues, um, and kind of just keeping, keeping our ton up, keeping your radar on, uh, can, can be an effective way to get out ahead of in front of, uh, an issue. If, uh, if there’s something developing, maybe there’s a dispute brewing between the general contractor and the owner. Um, if, if you’re aware of that sooner, you can be a little more aggressive and asserting your rights and protecting the rights and potentially the need, get an attorney to help you do everything you can. Uh, if there there’s a major issue brewing.

Peter Ryan (15:00):
Yeah. And, and that’s where asserting your job rights actually gives you kind of a voice. I mean, those of you that are subs and suppliers, very seldom get to talk directly to the owner, uh, or if, if you’re on a private job, the construction lender, but if you send in a stop payment notice to that construction lender, or you stand in a stop payment, notice to the owner, you’re going to get a phone call and then you’re going to get it directly from the horse’s mouth as to what’s going on on the top side of the project, the project that you never see, because you’re down in the weeds doing the work.

Cara Vallejo (15:44):
I have a question for y’all. Um, w would you say that, you know, having an attorney that understands your business before a problem happens is, would be beneficial to you and keeping up with contract reviews and other things that might benefit them, um, in the future when a problem does arise?

Peter Lindborg (16:07):
Yeah. I mean, I would say that that’s certainly the case, uh, that the biggest advantage that, that I have with existing clients is one, if it’s their contract, I know what the, I already know the contract. I know what their rights are on the contract. I know with obligations are. So if, if we need to take steps to address an issue, we can do so right away, and we can do it, do it quickly. And we know where, uh, basically where the cards are, uh, where things Lyle ready. Uh, and we set up things strategically to, to protect rights. Whereas if he gets somebody new, especially if, if it’s an urgent situation, there’s payment deadlines looming, um, it can be a very tough situation and, uh, you can lose leverage, lose rights, and perhaps not resolve a dispute, the should have been resolved, uh, because you’re behind the ball.

Peter Ryan (17:03):
Sure. And the other thing is just dealing with somebody who has a knowledge of the industry generally. I mean, you know, we, we take a certain amount of pride around here in, in representing all facets of the industry, uh, big public and private owners, general contractors, subcontractors, uh, materials, suppliers, sureties, et cetera, et cetera. And one of the things that that gives us is the advantage of understanding where the other side of the table is coming from. Well, because we’ve been on the other side of the table. So that helps a lot because you can assess the motives on, uh, on your opposite number much, uh, much easier and much faster.

Seth Bloom (17:53):
Okay. I think we got the, uh, we got the crowd going. Now we have some questions coming in. Um, Jamie asked, uh, what payment provisions would you recommend for contractors when working as a subcontractor, if there’s something that different they should do in that instance?

Peter Ryan (18:10):
Well, again, I would start with going back to, uh, the payment timing provisions, which are getting heavily negotiated now, uh, you know, it will typically say we’ll pay you within seven days of us getting paid. Why do you have, why does it say that? Well, it says that because statutorily it’s required, uh, but it’s important to follow that with a provision that says something like, and it, and if payment takes more than 30 days, then payment will be due 10 days after that, no matter what, you gotta put some sort of deadline on there where you’re defining reasonableness, because you’ve been, you’ve already been the bank for long enough. So now it’s time for somebody else to be the bank.

Cara Vallejo (19:06):
That’s great. I love it. Um, thank you so much for taking a question and a few questions and answer your question. That was so exciting to have, um, a question come through the chat. Any other thoughts or, or, or, um, last steps to avoid these payment problems before we move on, everybody get awesome. I check the chat one more time. Okay. Let’s move on to the next one.

Seth Bloom (19:35):
All right. Stories of success

Peter Ryan (19:42):
Stories. [inaudible]. If, if you win the war, you feel warm and fuzzy.

Cara Vallejo (19:53):
I think real real life. Examples are always a great way. Um, not only to make other people feel seen and heard, but to just give an example of how it, how it can work out. Okay. You know, you can walk through the fire and have all of these issues, but at the end of the day, it is okay because your business is protected. Um, so we would love to hear some stories about some success stories that do maybe, maybe end in some warm fuzzies.

Peter Ryan (20:21):
I think, I think, uh, what the contracting community needs to understand is you have a, a tremendous tool box of legal protections available to you. If you just, uh, use them for, or at least hire somebody who knows how to use them. And I’ll, I’ll give you, or we’ve talked the pay when paid, but I’ll give you a couple of more examples. There is a series of statutes in this state called the prompt payment act, which are from, from the pay or his viewpoint, incredibly draconian in the right circumstances. And what do I mean by that? If your upstream party has gotten paid and is withholding money from you without a good faith reason for doing that in the absence of a good faith dispute, you take your, you take your typical interest due on that payment and you throw it out the window and you get instead a statutory penalty of 2% per month, plus your attorney’s fees. And for those of you, and I hope there are not too many of you out there who are mathematically challenged, because that makes this business really hard to do 2% per month is 24% per year. And believe me, if all of us were making 24% per year on our investments, we wouldn’t be sitting here in this webinar. We’d be sitting on a beach drinking beer somewhere.

Peter Lindborg (21:57):
Yeah. But yeah, I think that’s a great example. Another thing, or another payment remedy that I, I see, especially smaller contractors overlook on public projects is that the payment bond almost, or every, uh, state project over $25,000, which is almost all of them in California, have a payment bond is required to have a payment bond that secured by the general contractor, uh, pub public, uh, federal projects, all are required to have a payment bond if they’re over a hundred thousand dollars. And what this bond does is it, it serves as security for all of the, the subcontractors and material supplier, direct material suppliers on the project. If they’re not being paid and they can simply make a claim against this bond, but they need to protect, uh, one protect the rights to make a payment bond, Wayne. And then actually assert like my I’m shocked, shocked how many times I come across, uh, clients that are on a public works project and have these rights.

Peter Lindborg (23:09):
And haven’t bothered to secure their claim in that way, which puts pressure on everybody. Cause everybody gets notice of, of the claim. And, uh, I guess one kind of war story example of that was, uh, a matter that we had, I guess it was resolved early this year and it was, uh, a project down in, uh, San Diego for the city of Chula Vista. And the client was a third tier subcontractor hadn’t been paid in a year and a half, uh, had sent a stop payment notice, but had never served preliminary notice. And the stop payment notice was no good. Um, and they were basically just being ignored, but I, we filed a complaint and we figured out who that the payment bond a surety was because they didn’t even know who it was named them. And the complaint is it turned out in that situation.

Peter Lindborg (24:09):
But the statutes require that the direct contract that secure the payment bond, uh, after the direct contractor does a lot of times, if it’s a multiple tier project back to that contract, your will require its subcontractors also to seek your payment bonds. But in this case, the direct contractor had not secured a payment bond instead of a direct contractor that had relied on its subcontractors to secure European bonds that created, uh, a big problem for the direct contractor and for the city itself, because the city by statute is required to confirm that a payment bond has been secured. So we were able to assert a claim directly against the city for that. And in doing that, that created the pressure necessary for the direct contractor to come to the table. When are our third tier, the second tier subcontractor, which was, had hired our third tier subcontractor had actually gone basically in the wind disappeared and run off with hundreds of thousands of dollars. So there wasn’t anybody direct to go after, but luckily, because we were able to assert these planes, we were able to get the direct contractor to the table to settle the company.

Peter Ryan (25:31):
Yeah, Peter’s absolutely right. Bonds. There are bonds on every public project. There are bonds on certain larger private projects. And anytime you’ve got a bond, you have a pressure point because, and you, you may avoid litigation altogether because you send in a notice to that surety, the way surety works is the contractor that’s posted that bond has an indemnity agreement with his charity. And the first thing the surety is going to do when it gets a notice from you is call up its contractor client and say, how are you handling this? Because if I have to handle it on your behalf, you owe me. So it’s, it’s, it’s a huge pressure point,

Seth Bloom (26:20):
Right? We have another, uh, another question that just came in from Joshua, um, is it possible to add a mobilization clause to the contract order to receive payments, to cover the first 30 days of work?

Peter Ryan (26:37):
The answer to that is absolutely. And that’s a great idea. Uh, you see that particularly big jobs, but even on smaller jobs in order to make it, uh, easier, uh, to get through that first 60 days, you see a lot of, uh, uh, very vigilant contractors that will at least attempt to get a mobilization paid payment, paid to them. And that’s due either first day or at the very least it’s due on the 30th day. So you’re not hanging out until your 60th day,

Peter Lindborg (27:14):
But yeah, I would absolutely agree. And what I would add to that is the, uh, mobilization costs can also be useful in negotiating change orders associated with multiple mobilizations. Uh, I’ve had a lot of clients that are been ended up doing work on projects that, uh, get stopped in our tracks because of rain delays or RFID or something that makes it, that they can’t complete their work. They have to demobilize and wait basically. And a lot of them under the contract don’t have any choice, but to wait until they’re instructed to re mobilize. But a lot of times when they are instructed to come back, well, there are costs associated with mobilizing again for a second or third or fourth time. If you have a mobilization pause that clearly spells out what, what the cost associated with mobilization are, uh, it makes it much easier and it gives you more leverage in negotiating a change order associated with full mobilization.

Peter Ryan (28:12):
Yeah. And even if you don’t have a mobilization clause, the temporary suspensions at work are, are, are classic claims scenarios where you should, even, if you don’t have that clause, you should still be asking for that extra month.

Seth Bloom (28:31):
All right. Well, we’re getting close to that 30 minute mark, but I wanted to make sure we, there’s not any other questions out there or invite additional questions. I know that’s why Peter and Peter are here today. So, um, any questions out there by anyone that’s watching this,

Peter Ryan (28:47):
Take your head and take advantage of it, guys, you know, it was my granddaddy used to say, if you think talk is cheap, speak with my attorney.

Cara Vallejo (28:58):
That’s awesome.

Seth Bloom (29:01):
Yeah.

Cara Vallejo (29:01):
Yeah. Well, um, if you do have questions and maybe you don’t feel like throwing them in the chat right now, um, we also have something called our community here at Levelset and you can ask questions through the community, um, and that it attorneys, um, and construction lawyers will gladly answer those questions. Um, and on top of that, we’re actually going to have an exclusive webinar, post webinar conversation over on our community. Um, anyone that attended today will receive an email with the recording from this webinar, as well as a link to that exclusive conversation. So, uh, that is something fun you can choose to be a part of. Uh, thank you guys so much

Seth Bloom (29:41):
For joining. This was great. And I know there’s people out there and thank you care. I know there’s people out there that aren’t from California. So if your questions in Texas or Florida or Wisconsin, or wherever it is, just go ahead and post it there. And the expert center know, get a lawyer from one of those states to answer and give you some information, help you solve your payment problems. Um, why don’t we go to the next slide and just, we’ll do a quick introduction here to legal garden. That’s something exciting we have right now going on at Levelset, legal guard is the first legal plans specifically for the construction industry. Uh, both Peter and Peter are members of it. It’s something that you can talk to us about it Levelset, and this kind of, uh, you know, allows you and your company to get access to attorneys quicker, get some questions answered for free and also get discounted legal services.

Seth Bloom (30:34):
That’s something you should really check out on our website about Levelset, legal guard, and learn how you can bring your business up. Because I think a lot of people think they don’t need to call their attorney or have an attorney until there’s a problem, but actually being proactive and letting an attorney, read your contracts and read your agreements and understand and talk to you about the setup of your business is really going to help you in the future, um, towards a more successful business. It’s really part of it. So thanks everyone for coming out today. We really appreciate it. Uh, payment help is here. And, uh, like, like we said, Kara, uh, has a great program afterwards to continue this, uh, in the expert center. And I know you’re all getting emails now, so thanks a lot to Catherine, Peter, Peter, and Cara for putting this on. And I appreciate, uh, y’all allowing me to do this today. So thank you so much. And we look forward to more great webinars like this. Thanks everyone. And thank you always. Good to see you. Yeah, you too. Next time. I hope in person. Bye bye-bye.