Project Payment 101 for Contractors

Having represented contractors, large and small, over the years, there is one thing that is unique about the contracting business model.

It is often the case that contractors find themselves at greater financial risk than many other businesses because they must invest significantly in a project in order to recoup profits back out of that project.  Unlike other businesses that may have a much higher volume of business involving lower dollar amounts if a general contractor, subcontractor, tradesman, or material supplier gets caught up in a commercial construction project or residential construction project without getting paid, a single project can ruin the finances for the whole company for an entire year or perhaps even threaten the very survival of the company.

Therefore, it is absolutely imperative that contractors take the steps they need to take in order to ensure payment.  There are several tools available to contractors and to their attorneys that, if used properly, can greatly reduce the chances of getting caught in a bind with respect to payment.  This blog is a brief overview of some of the legal tools at your disposal, but you will see that each one requires the contractor to develop administrative systems that give the attorney time to take the necessary actions.

The first consideration for contractors is to determine whether projects or private projects or public works projections.  The tools at your disposal are powerful in each instance, but are somewhat different depending on whether the project is privately or publicly funded.

Private Projects

Projects in which you are a general contractor, subcontractor, or supplier for a private party sometimes involve bonds, but often do not.  In New Mexico, the most important tool for the contractor is New Mexico’s Mechanics’ and Materialmen’s Lien Act (§48 2 1, et seq.).  The Act sets forth some fairly in-depth procedures for perfecting a lien, with which a competent construction attorney can assist you in the event of a delinquency, but are probably not worth knowing by heart for every project.

The most important thing to remember about the timelines is that you have 90 days following the completion of the project in which to record a lien at the County Clerk’s Office for the county in which the project sits.  This means a lien must be properly drafted, including a legal description of the property on which you provided labor or materials, and that lien must be recorded at the County Clerk’s Office, all within 90 days of the completion of the project.  If you are a subcontractor or a supplier who provided materials early in the project, this may be as much as a year after you provided labor or materials, but you must have a system in place for tracking the pace of the project and the status of the project.  If you are the general contractor, or a party who has a contract directly with the owner, you may be considered an “original contractor” in which case you have 120 days.  The bottom line is that your administrative staff must come up with a system for tracking payment on projects.  The deadlines above are strict deadlines and are the only way to ensure that you would have some security against the value of the property itself in the event of non-payment.  Be wary of owners or general contractors, or in the case of equipment suppliers, subcontractors, who continually delay promising to make payment when paid by the owner or contractor above them in the project, as this will not be an excuse for a late filing.  Questions?  Call a competent construction law attorney.

Public Works Projects

For both state and federal government projects, there are statutes that provide for the protection of contractors and suppliers who provide material or labor to a project.  The model statute on which they are based is a federal statute called the “Miller Act,” with many states having what are commonly known as “Little Miller Act” equivalents.  New Mexico has such an act at §13-4-18, et seq.  The key difference between these two statutes is the running of the timeframes involved.  That question, in turn, will turn on whether or not you have a relationship directly with the general contractor.

If you are a subcontractor in direct contractual relationship with the general contractor, it is often presumed that the general contractor will have notice of the existence of your claim. Nevertheless, it is highly recommended that you send monthly invoices and statements to the general contractor, preferably by facsimile or some other means by which you can prove that notice was provided, just to eliminate any debate about the notice provisions.  Keep in mind that notice must usually be provided within 90 days of the provision of labor or materials, which is different than the lien statute above, which keys off of the completion of the project.

If you are a supplier or a subcontractor who does not have a direct contractual relationship with the general contractor, these notice provisions are even more important.  I have had countless clients come to me with collection issues long after these deadlines have passed, but on public works projects that otherwise were fully bonded.  You will have tremendous leverage if you provide notice of a bond claim, because the bonds that are required for both federal and state projects are often provided by reputable insurance or bonding companies.  This means that you will get paid even if the general contractor or the subcontractor above you goes bankrupt and is unable to pay you for work or materials provided.  It is a tremendously powerful tool, but one cannot stress the importance to any supplier or contractor who does not have a contractual relationship with the general contractor for providing the required notice.

Here again, you must have a system in place to track the status of payments for such projects.  It should be separate from your private projects, as those projects will not typically involve payment bonds as is legally required on these public works projects.

Prompt Payment Act

For contract in New Mexico, many of them are governed by the New Mexico Prompt Payment Act (§57-28-1, et seq.), which provides for prompt payment of amounts due under construction contracts, and significantly, allows for recovery of attorney’s fees and pre-judgment interest in the event of a violation.

Should you be a contractor finding yourself in need of assistance in dealing with any delinquent account, feel free to contact Albuquerque Business Law, and one of the attorneys experienced in the above statutes can assist you and can hopefully ensure that you are paid on your contract.