Collecting on Construction Projects: An Overview of Collection Options

Contractors, suppliers, and other professionals who labor on construction projects incur significant risk by agreeing to provide their services on construction projects. At least some payment is almost always delayed until the end of the construction project. Such professionals thus become lenders by extending credit, in the form of the value of their services, to the project owner or the person with whom the contract was entered.

As with any lender, contractors, suppliers, and other professionals sometimes are not repaid for the credit they extend. Collecting for unpaid services is too frequently a concern for these trade creditors.

In recent years, collecting has become more difficult because the person or entity who failed to pay may be uncollectible due to bankruptcy or dire financial circumstances. Fortunately for these construction trade creditors, Arizona allows multiple collection options. In many circumstances, a construction trade creditor can even collect against more parties than just the one who failed to pay under the contract. Below is a brief overview of some of these options.

Mechanic’s and Materialman’s Liens

(Available for Licensed General Contractors, Licensed Subcontractors, Material Suppliers, and Professionals against Private Project Owners.) [1]

A mechanic’s or materialman’s lien (“Mechanic’s Lien”) can be recorded against construction projects to secure payment for the labor, materials, supplies, and other services provided to that project. Recording a Mechanic’s Lien is not a simple process. A variety of rules restrict the jobs that can be liened, and further limit the amount of money a contractor is entitled to collect via a Mechanic’s Lien. Foreclosing the Mechanic’s Lien and selling the property is also a complicated, lengthy process that must be followed precisely for the contractor to properly foreclose its lien. If all statutory requirements are satisfied, a successful Mechanic’s Lien foreclosure lawsuit entitles the claimant to sell the subject property and collect payment for its services, including its reasonable costs of recording the lien and bringing the lawsuit.

Mechanic’s Liens are not available on all projects. For example, a Mechanic’s Lien cannot be placed upon public construction jobs, or on owner-occupied residential projects, unless the liening entity has contracted directly with the residential owner. Furthermore, if the work performed requires a license from the Registrar of Contractors, that contractor must have a valid contracting license in order to file a Mechanic’s Lien against a property.

Mechanic’s Liens are often invalidated due to the lienors failure to provide a timely preliminary twenty-day lien notice to the project owner within twenty (20) days of beginning a project. If not provided, the claimant loses all rights to record a Mechanic’s Lien. If the preliminary twenty-day notice is provided late, the claimant loses its right to place a Mechanic’s Lien for any services provided more than twenty (20) days before such preliminary lien notice was provided. A claimant must also act quickly to ensure that its deadlines for recording the Mechanic’s Lien or beginning foreclosure proceedings do not expire. The deadline for filing a Mechanic’s Lien can expire as soon as sixty days after a project is complete.

Even though a Mechanic’s Lien can be difficult to foreclose, it is still useful at securing payment because Mechanic’s Liens are often paid without a lawsuit. Property owners can rarely obtain financing against a property subject to a Mechanic’s Lien; therefore, many Mechanic’s Liens are paid simply so the property owner can borrow money or sell the property.

Payment Bonds

(Available for Subcontractors or Material Suppliers Against General Contractors on Publicly Owned Projects.)

Mechanic’s Liens cannot be recorded against publicly owned properties. Instead, Arizona requires all general contractors to procure a payment bond from a surety company to secure payment for those who supply labor or materials to a general contractor or its subcontractor on a public project. An unpaid subcontractor or supplier may apply for payment from the payment bond without filing a lawsuit, so long as the claim is timely and properly made. If the surety company denies payment the contractor has the option of filing a lawsuit asking that payment be awarded from the bond. The prevailing party in such a suit is entitled to collection of its reasonable attorneys’ fees and costs incurred as a result of such action.

Prompt Payment Act Violations

(Available for Contractors against Owners; Subcontractors against General Contractors; and Material Suppliers Against Contractors.)

Arizona requires progress payments to be made on all construction projects lasting 60 days or more. The Prompt Payment Act provides that all contractors should be paid for work deemed approved and certified no later than 51 days after performing such work. Under this Act, the contractor must provide the owner with an invoice of its services every 30 days. In return, the owner must pay that contractor within 7 days after the invoice is certified and approved. The invoice is automatically deemed approved and certified within 14 days of receipt, unless the owner objects to it in writing within that time. The owner may only object for a limited number of reasons, such as poor work, unperformed work, or damage to the owner, and the owner can only withhold a sufficient amount of money to remedy the objection.

The Prompt Payment Act also applies to subcontractors who submit invoices to contractors and material suppliers who submit invoices to contractors or subcontractors. Unless the recipient objects in writing to the invoice within 14 days of receipt, the invoice is automatically deemed certified and approved and must be paid within 7 days thereafter.

If a licensed contractor fails to make payments as required by the Prompt Payment Act, a contractor or material supplier harmed by such nonpayment may file a complaint against the offending licensed contractor with the Registrar of Contractors (the “ROC”). A complaint filed with the ROC is usually resolved much more quickly than a lawsuit. This complaint will be heard by an Administrative Law Judge at a comparatively informal hearing. If successful, the Prompt Payment Act complaint will lead to the suspension or revocation of the offending party’s license until payment is made.

Prompt Payment Act violations may also be brought as a civil complaint against the offending party and requires reasonable attorneys’ fees and costs be paid to the prevailing party in such an action.

License Bond Claims

(Available for Contractors, Subcontractors, and Suppliers who are damaged by a Licensed Contractor.)

Persons or entities who are owed money from a licensed contractor may also make a claim against such contractor’s license bond. All licensed contractors are required to obtain a license bond to pay just claims filed against such contractor. The size of the license bond varies depending on the size of the contractor, from approximately $1,000.00 to $100,000.00. Even though license bonds are often smaller than the amount of claimed damages, licensed bond claims are useful because uncontested claims are paid promptly without the need for a lawsuit. Contested license bond claims can be filed as lawsuits if the claim is denied, and the prevailing party may be awarded its reasonable attorneys’ fees and costs incurred by bringing such lawsuit.

Licensed bond claims must be promptly filed because such claims are paid in the order that the claim is made. Once a bond is exhausted, no additional claims will be paid, regardless of the merit of such claims.

Stop Notice

(Available for Contractors, Subcontractors, Material Suppliers, or Professionals against Private Commercial Project Owner or Lender.)

A stop notice is a notification given to a project owner or construction lender that a party is unpaid on the project. After receiving a stop notice, the owner or lender may withhold construction funds from the general contractor or owner sufficient to pay the claim. If the stop notice is properly bonded, the owner or lender no longer has a choice; the money must be withheld from the general contractor or owner until the claim is resolved. General contractors may not file stop notices upon a private project owner, but may serve such notices upon a construction on commercial or residential project lenders.

If more than 10 days expire after service of the stop notice and the party is still not paid, a lawsuit may be filed to collect the amount claimed to be owed. Such a lawsuit must be brought quickly, in no event can such a lawsuit be filed more than 210 days after a project is complete and this deadline is often shortened.

Breach of Contract Complaint

(Available to Contractors, Subcontractors, Material Suppliers, and Owners against any party who entered a contract with such person or entity.)

Lawsuits should be the collection remedy of last resort; however, sometimes lawsuits become necessary. Breach of contract claims are the most common lawsuit collection claim. This claim simply requires the plaintiff to prove the existence of a contract, a breach by the opposing party, and the damages caused by such breach. Arizona upholds verbal contracts; a written contract is not required. The Plaintiff, however, does have to show privity of contract with the Defendant. For example, a subcontractor may not bring a breach of contract claim against an owner, because the subcontractor and the owner are not in direct contract with one another. The subcontractor in this example can only bring a breach of contract claim against the general contractor. Arizona allows the prevailing party in any claim arising out of a contract to be awarded its reasonable attorneys’ fees and costs incurred in bringing its claim, within the judge’s discretion.

Unjust Enrichment Claim

(Available as a fallback claim in all breach of contract lawsuits and also for Subcontractors or Material Suppliers against an Owner.)

Unjust enrichment claims are simply claims that any person or entity has unfairly benefited at the expense of the Plaintiff. An unjust enrichment claim is usually included as a fallback claim to all breach of contract claims in the event that the Court declares the contract invalid. Additionally, unjust enrichment claims provide a contractor or material supplier with an additional remedy against a project owner. As discussed above, breach of contract claims require privity. Where a subcontractor or material supplier lacks this privity with the project owner, or any other person or entity, the subcontractor or supplier may still bring an unjust enrichment claim against that person or entity. This unjust enrichment claim is barred, however, if the owner paid another party for the services, such as the general contractor, even if the general contractor failed to pay the subcontractor or material supplier.

Conclusion

The most common defense to all of the collection options presented above is an allegation that the contractor or material supplier did not adequately perform its contract, and is thus not entitled to payment. Contractors should take steps to counter this likely argument on all projects, even before lack of payment becomes a concern. This can be done by regularly discussing the project with the general contractor or project owner and taking extensive photographs of high-quality work.

This article is not legal advice. All of the collection options discussed above are merely a brief overview intended to familiarize contractors with some of the various collection options, but is not an exhaustive list of the collection options, nor does this article discuss all of the exceptions to the general principles discussed above. All of these options are time barred at some point; therefore, any owner considering such collection options should meet with a licensed Arizona attorney familiar with such matters promptly to discuss the best collection option for your particular circumstances.

This article is not intended to be specific legal advice. It only provides general legal information. You should consult an Arizona licensed attorney if you have a legal issue. The Bainbridge Law Firm, L.L.C., is experienced in this area of law and are available for consultation. You may contact our Phoenix office at 602-902-1930.

[1] The availability lists that appear under each topic heading are not an exhaustive list of the collection option’s availability or restrictions, but merely list the most common usage of each option.