Four Steps Construction Professionals Need to Take to Ensure They Get Paid
As a construction professional, it is crucial to your business and your bottom line that you are paid fairly for the work that you do. Late or missing payments can make it difficult to cover your overhead expenses, to pay your employees on time, to keep to a project schedule, and for your business to make profit, among other issues. Staying up to date on both state and local level licensing requirements, registering your entity with the appropriate Secretary of State offices, being aware of the relevant contract disclosure requirements, and implementing strong contract provisions are key to making sure that you receive the payment that you work so hard to earn.
#1 and #2: Licensing and Secretary of State Registration
State and local level licensing requirements are important in the construction industry to ensure that contractors are qualified and capable of performing the work that they are contracted to do. This generally involves passing exams, demonstrating knowledge and experience, and meeting other requirement related to safety, insurance, and financial responsibility. From a payment perspective, these licensing requirements ensure that contractors are legitimate and trustworthy businesses, which can increase the likelihood that you will be paid for your work. In the same vein, registering your business with the Secretary of State’s office is equally as important both legally and reputationally.
Registering with the Secretary of State’s office is often required by law, depending on the state in which your business is operating. While failure to register your business can result in legal penalties, fines, or even suspension of business operations, it can also result in the loss of legal recourse if you are not paid for your work. Compliance with state laws for registering your business is required if you wish to enforce your contract and ensure that you obtain the proper payment for your work. At the very least, many states will require that you have a registered agent in each state that you do business with a physical address within that state. It typically costs somewhere between $35-60 per year to maintain your registered agent. In some states, registering with the Secretary of State’s office makes the name and contact information of the owner publicly available. Other states offer anonymous business registration programs to certain business entities such as Limited Liability Companies (LLC) or corporations. Importantly, however, while anonymous business registration can provide additional privacy, it does not shield the owner from all legal or regulatory requirements associate with running a business.
#3: Required Contract Disclosures for Each State
Most states have specific requirements on residential contracts and if they are not included the contract could ultimately be determined to be unenforceable or the contractor could be precluded from asserting mechanic’s liens. Required contract disclosures can help protect both parties to a contract. They promote transparency in the contracting process so parties can be sure that they are entering into a fair and equitable contract. Some examples of common required disclosures include Scope of Work, Payment Terms, Change Orders, Dispute Resolution, Insurance, Termination, and Notices. By requiring certain disclosures, parties can better manage their risks. However, every state has its own laws governing disclosure requirements when contracting with residential homeowners. This makes knowledge about the laws governing required contract disclosures very valuable, especially if your business operates in multiple states that all have different laws regarding contract disclosures.
#4: Strong Contract Provisions
If the goal is to guarantee payment for the work that you and your employees did on a project, it is very important to make sure that the provisions of your contract reflect that goal. The following types of provisions should be included to increase the likelihood of receiving payment.
Money held in trust provisions can ensure that funds are available to pay for the work performed by a contractor and its subcontractors. Under this type of provision, the owner agrees to hold a certain amount of money in trust for the contractor, which is then used to pay for the work performed.
Choice of Law and Venue provisions clarify the legal framework under which any disputes between the parties will be resolved. This helps the parties avoid confusion and uncertainty about which laws and courts will apply in the event of a dispute as well as avoid the expense and inconvenience of travelling to a distant location for legal proceedings.
Payment Terms provisions specify the amount of payment, the payment schedule, and any penalties for late payment. Clear payment terms help to avoid disputes by setting out the expectation of the parties upfront which, in turn, can also help to ensure cash flow during throughout the course of a project.
Interest on Non-Payment provisions specifies the interest rate that will be charged on any unpaid amounts owed by one party. This provision is typically included in payment terms of the contract and is intended to incentivize timely payment by the party that owes the money.
Default or Termination provisions clarify the circumstances under which one or both parties may terminate the contract prior to the completion of the project. This provision provides a clear process for dealing with situation where one party is in breach of the contract or otherwise unable to fulfil its obligation under the contract.
Confidential Information provisions are a good idea for protecting information such as drawings, plans, specifications, trade secrets, and other proprietary information. Exceptions may exist where certain disclosures are required by law or where the information is already in the public domain.
Damages Remobilization provisions outline the damages that a contractor will be entitled to if the project is delayed or interrupted due to the fault of the owner or other parties forcing the contractor to demobilize and then remobilize in order to complete the work. This type of provision can help to protect you against financial losses that may result from delays and interruptions that are beyond your control.
Price Volatility provisions are a good idea in so much as they define what constitutes price volatility such as unexpected market fluctuations in the cost of labor, materials, or other factors that affect the overall cost of the project. If tailored correctly, this type of provision can help to ensure that both parties of the contract absorb a fair amount of any unexpected costs of this nature.
Standard of Care provisions establish the expectations for the quality of work and services to be provided by the contractor and provides a framework for determining whether those standards have been met. This provision would set out the required level of skill, care, and diligence by which the work will be performed. Language such as “good and workman like manner” or “reasonable standard of care” are often used in this type of provision.
Prime Contractor’s Right to Accelerate or Complete Work provisions allows the prime contractor to address delays or other issues that may arise during a project and help to ensure timely completion.
Force Majeure provisions excuse the parties from performing their obligations under the contract when unforeseen events beyond their control occur. Often referred to as “acts of God,” examples of these events include natural disasters, strikes, government regulations, or other events that could not have been anticipated or prevented. Force Majeure provisions should generally be broad in scope to allow parties to respond to unforeseen events in a reasonable and flexible manner.
To ensure that you are up to date on all state and local licensing requirements, making all required contract disclosures, and including necessary contract provisions to protect your payments, it may be helpful to consider retaining an attorney to navigate this process. The experienced attorneys at Galvanize Law Group are happy to assist you in ensuring that your contracts allow you to get paid. Our attorneys are licensed in CO, WY, TX, OR, AR, and MA and assist clients in doing business throughout the mountain west. Contact us to learn more about the steps that can be taken to make sure that you and your employees are getting the payment you deserve.