For construction professionals, submitting the winning bid and completing the job are only two of the many steps involved in a successful project. To reap the financial benefits of the job, construction professionals must make sure they are paid, in full, for the work performed and materials provided. Many options exist for construction professionals to ensure they are paid for their services. Construction professionals should consider the various options, and determine which option provides the fastest and most efficient means of resolution for their situation. The following is a brief overview of a few of the options construction professionals should consider when working on both private and public construction projects.
The truth underlying the old adage "an ounce of prevention is worth a pound of cure" is never more apparent than in the drafting of construction contracts. This is especially true when the parties are deciding how and when a construction professional will be paid. Too often, the parties to a construction contract focus on the amount of the contract and the scope of work to be performed. While both of these topics are clearly integral components of the contract, the parties would be wise to also focus on another, often overlooked, component of the contract — the manner and timing of payment. Construction professionals need to make sure that the contract terms clearly and unequivocally set forth the manner and timing of payment. Proactive steps taken on the front end of the process will save time (and possibly attorneys' fees) on the back end. For example, if progressive payments are to be made, the benchmarks for such payments must be clearly defined.
Sometimes, however, no matter how clearly the contract is drafted, construction professionals simply do not receive payment for the labor and materials they provide on a project. In such cases, and on private projects, construction professionals often secure their payment with the filing of a mechanics' lien against the subject property.
Colorado's Mechanics' Lien Statute, C.R.S. § 38-22-101, et seq., is the most common avenue taken by construction professionals seeking to secure payment for services provided. The mechanics' lien statute, however, is riddled with potential pitfalls for the unsuspecting contractor, including the statute's often confusing and onerous recording and notice requirements. Note that Colorado's Mechanics' Lien Statute does not apply to construction projects for governmental agencies. For a brief discussion of securing payment on public projects, see below.
Notifying the Disburser
If a contractor has not been paid for its work, it might consider notifying the disburser of the loan proceeds rather than recording a mechanics' lien. Generally, the disburser is the bank that provided the construction loan, or an agent thereof, but can include any person who receives funds from a lender, contractor or owner, and who agrees to disburse those proceeds from time to time as work progresses on a project. A disburser may also include any owner who agrees to make progressive payments to any contractor on the project.
In order to provide proper notice to a disburser, the claimant must provide the notice in writing and serve it upon the disburser by either personal service or certified mail. After the notice is served, it is the disburser's legal duty to ascertain the amount due to the claimant and to pay such amount out of any undisbursed funds. The disburser must make the payment directly to the claimant. If there is a dispute regarding the amount to which the claimant is entitled, the disburser may impound such amount until an agreement is reached or a court determines the proper amount to be paid. If a disburser fails to comply with its obligations, the disburser is liable to the claimant for the amount which the claimant should have been paid.
A payment bond is a surety bond posted by a general contractor to guarantee that its subcontractors and material suppliers on the project will be paid. When it comes to making a claim on a payment bond, the first question is always whether the project is a public or private project. In general, whenever a contractor on a private construction project has not been paid for labor or materials provided, that contractor should provide notice in accordance with the specific term of the bond to the project's general contractor (in the case of a subcontractor), the owner,? and the surety that issued a payment bond for the project. Such notice should be in writing and delivered via certified mail, return receipt requested. Making a claim on a payment bond issued in relation to a public construction project, however, is more difficult and is governed by federal and state statutes. Similarly, because a construction professional cannot lien publicly owned land, a lien created under the Federal Miller Act or the Colorado Public Works Statute is against the contract funds — not the real property upon which the project sits.
The Federal Miller Act
The Miller Act, with some exceptions, applies to federal contracts of more than $100,000 for construction, alteration, or repair of public buildings or public works. A subcontractor who has not been paid in full within 90 days after the final labor or materials were provided may file a federal court civil action on the general contractor's payment bond. The civil action, however, must be filed no later than one year after the last day any labor or materials were provided under the contract. Unlike subcontractors, sub-subcontractors must provide written notice to the general contractor prior to filing any civil action. The notice from the sub-subcontractor to the general must occur within 90 days after the final labor or materials were provided, and must be personally served or sent via certified mail, return receipt requested. Sub-subcontractors have one year from the date the aforementioned notice is provided to file a federal civil action on the payment bond.
Colorado's Public Works Statute ?
Any construction contract in excess of $50,000 and awarded by the State of Colorado or its counties, cities, municipalities, school districts, or other political subdivisions is governed by the Colorado Public Works Statute, C.R.S. § 38-26-105 ("Statute" a/k/a "The Little Miller Act"). Any action under the Statute must be brought within six months after substantial completion of the work. In order to create a valid lien on the contract funds, the construction professional must file a verified statement of claim with the public entity on or before the date the public entity makes the final payment on the project. Furthermore, once final settlement occurs, the claimant only has 90 days to file a suit to foreclose its lien and file a lis pendens. Failure to comply with these deadlines will result in a forfeiture of the claimant's right to receive the funds from the governmental agency.
Many avenues exist to ensure that Colorado's construction professionals receive payment for the labor and material they provide on a construction project. The most efficient and least expensive option will depend on the facts and circumstances of the particular project.