A building project typically involves several subcontractors -- electricians, bricklayers, plumbers and more -- with the main contractor overseeing and coordinating them. Part of the contractor's job is disbursing payments to the subs and suppliers. If a subcontractor doesn't get her money, she may be able to sue the contractor. It's often easier to sue the property owner, however.
If the subcontractor doesn't get paid, she can file a mechanic's lien on the building. First, the contractor notifies the property owner, then she files the lien if he doesn't pay. She can use the lien to foreclose on the property and get her money from the sale. It doesn't matter if the property owner paid the contractor in good faith. The law is designed to protect subcontractors, even if the homeowner has to pay for the work twice.
Going After the Contractor
A subcontractor can sue the contractor rather than filing a mechanic's lien. The sub can also report the contractor to the state licensing board. The exact rules and penalties vary with state law. In California, for example, a sub can sue for the original unpaid bill, plus interest, legal fees and a penalty equal to 2 percent of the bill. Subs also can take action if the contractor delays payment for longer than state law allows.
Pay If Paid
Some contractors protect themselves by including a pay-when-paid or pay-if-paid clause in their subcontractor agreements. Pay-when-paid says the sub only gets paid after the property owner disburses the money. It doesn't completely exempt the contractor from paying subcontractors. Pay-if-paid is a stronger clause. It says if the owner doesn't pay, the sub has no claim against the contractor. Courts in some states, such as New York, have ruled that pay-if-paid violates the sub's rights. Courts elsewhere have allowed the clause.
Some property owners, particularly a state, local or federal government, require the contractor to take out a payment bond with a surety company. A payment bond is a kind of insurance: If the contractor doesn't pay the subs, the surety company takes care of it. This protects the owner and ensures the subs get paid. The surety company can then sue the contractor to collect its money. Subcontractors can usually file up to a year after they last worked on the project.
- Nolo: Mechanic's Liens From Home Improvements
- Stimmel, Stimmel & Smith: Penalties for Failure to Pay Subcontractors
- Zetlin & DeChiara: The Consequences of "Pay-If-Paid" and "Pay-When-Paid" Construction Contracts Clauses
- Lexology: The Differences Between "Pay if Paid" and "Pay When Paid Clauses in Construction Contracts
- Cross Agency: Payment Bonds: Protection for Subcontractors
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.