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PAYMENT ISSUES ON CONSTRUCTION PROJECTS The construction industry, like all businesses, revolves around a very simple concept
doing work for profit. Wen a contractor finds itself in a position where work is being performed but payment is not forthcoming, determining an appropriate course of action is vital. Generally, a contractors rights in a nonpayment situation will be addressed by the contract documents. Both Ohio and Federal law also address this important issue. Below is a brief summary some common remedies available for contractors experiencing payment problems. A. Right to Stop Work
A contractors first instinct when it is not getting paid may be to stop performing work on the project. A contractors right to stop work or terminate the contract will usually be addressed in the construction contract. Due to the severe financial repercussions that can result from a
contractor pulling off the job in the middle of a project, it is essential that the contractor understand and follow all applicable procedures. For example, some contracts may require
written notice of the problem that justifies cessation of the work, and may also provide a reasonable opportunity for the issue to be cured. If the contractor fails to follow the applicable procedures, the resulting liability could be catastrophic. Most standard form construction contracts, such as those developed by the American Institute of Architects (the AIA), contain provisions that narrowly define the circumstances under which a contractor can stop work or terminate the contract. Typically, there are stringent limitations on the ability of a contractor to stop work. For example, under the claims process contained in AIA Document A201, pending final resolution of a claim the contractor is obligated to continue performance under the contract.
This material has been prepared by the law firm Coolidge, Wall, Womsley & Lombard Co., L.P.A. The information herein is abridged from laws, court decisions, administrative rulings, and general legal information and should not be construed as legal opinions on specific acts. Readers should not act upon information contained on this website without professional guidance.
Copyright 1997- 2003, Coolidge, Wall, Womsley & Lombard, Co L.P.A., All rights reserved. Page 1 of 12
The obligation of the contractor to continue working, however, is not absolute. Although generally restrictive, the A201 contract allows a contractor to stop work under certain, limited circumstances. Under Article 9.7.1 of A201, if the Architect does not issue a Certificate for
Payment, through no fault of the Contractor, within seven days after receipt of the Contractors Application for Payment, or if the Owner does not pay the Contractor within seven days after the date established in the Contract Documents the amount certified by the Architect or awarded by arbitration, then the Contractor may, upon seven additional days written notice to the Owner and Architect, stop the Work until payment of the amount owing has been received. While this
clause allows the contractor to stop work, it is important to note that the contractor must have no fault and that timely, written notice must be provided. With respect to termination or suspension of the contract, under Article 14 of A201 the contractor may terminate the contract if the work has stopped for 30 days due to one of six reasons: 1) a court order; 2) an act of government which requires work to stop; 3) the architect has not issued a certificate of payment or a reason for withholding the certificate; 4) the owner has not paid a progress payment; 5) repeated delays caused by the owner as a result of suspension of work for the owners convenience, if such delays equal the length of the contract or 120 days, whichever is shorter; or, 6) the owner fails to provide information required under the contract documents. notice and cure periods. If the construction documents do not address the contractors right to stop work or terminate the contract, the argument could certainly be made that a substantial breach of contract by the other party would allow the contractor to suspend or terminate the work. Nonetheless, the The right to terminate the contract, however, is limited by various
contractor should not take this step lightly. A finding against the contractor on this issue could result in significant liability. B. Mechanics and Materialmans Liens
If a contractor is faced with a payment dispute, a mechanics lien can provide a method to secure payment. Ohios Mechanics Lien Statute, Ohio R.C. 1311.01, et. seq., extends lien rights to original contractors, construction managers, subcontractors, materialmen, and laborers who have furnished labor, work or materials to improve real property. The statute applies to
residential, commercial, and public construction projects, but the requirements to assert a valid lien on each type of project vary. It is also important to recognize that the procedural
requirements to file a mechanics lien are very precise and technical, and courts will not enforce a lien unless all procedures have been strictly followed. A detailed discussion of the technical
requirements of Ohios lien statute is beyond the scope of this article, but some basic concepts and issues are addressed below. 1. Basic Process For Asserting Mechanics Liens a. Notice of Commencement
In reviewing the process to assert a mechanics lien, certain procedural issues that may arise due to actions taken by the owner must be understood. Ohios lien statute provides a means by which owners can potentially limit their exposure to mechanics lien claims. For most private and public improvements, an owner, part owner, lessee, or their agent, should file a Notice of Commencement. A Notice of Commencement serves as public notice that a construction project is about to begin. This gives potential lien claimants information needed to perfect a mechanics lien, but also imposes on them an obligation to serve a Notice of Furnishing. As such, the Notice
of Commencement acts as a roll call for all potential lien claimants on a particular project. A Notice of Commencement is not required, however, in connection with a home construction project. The Notice of Commencement must be filed in the office of the County Recorder where the improvement is located, and thereafter served upon any original contractor and posted in a conspicuous place on the job site. The owner is also under an obligation to respond to any
written requests for a copy of the Notice of Commencement from subcontractors, materialmen and laborers. The failure to record, serve and post a Notice of Commencement can result in the following consequences: 1) a Notice of Furnishing is not required as a prerequisite to filing a
valid mechanics lien; 2) if the Notice of Commencement is recorded after work has begun, the time within which a Notice of Furnishing must be served is extended by 21 days from the date the Notice of Commencement is filed; and, 3) if a Notice of Commencement is not timely served upon a requesting subcontractor, materialman or laborer, the time in which a Notice of Furnishing must be filed is extended by a period of 21 days from the date the Notice of Commencement is served. b. Notice of Furnishing
In order to preserve the statutory right to file a mechanics lien, subcontractors and materialmen must serve a Notice of Furnishing upon the owners designee within 21 days of starting work. Lower-tier subcontractors and materialmen must also serve the original contractor with a Notice of Furnishing. This is not required, however, for a home construction project. The Notice of Furnishing is intended to give notice that there are potential lien claimants involved in the project.
If a Notice of Commencement has been properly filed and served, then potential lien claimants must serve a Notice of Furnishing within 21 days after first performing work or furnishing materials to fully preserve their lien rights. In the event a Notice of Commencement However, if the Notice of
has not been filed, then a Notice of Furnishing is not required.
Commencement is filed late, a Notice of Furnishing will still need to be served. It should also be noted that a Notice of Furnishing is not required if the contractor or materialman contracted directly with the owner. Finally, it is not necessary for a laborer to file a Notice of Furnishing to preserve his or her lien rights under the statute. Where a Notice of Furnishing has been timely served, the lien claimant preserves its lien rights for the full value of any potential claims from the date it first provides labor, work or materials. If the Notice of Furnishing is served late, only the labor, work or materials performed or furnished within 21 days prior to serving the Notice of Furnishing can be claimed through a mechanics lien. c. Affidavit for Mechanics Lien
After the required Notice of Furnishing has been served, and within the time allowed by statute, an Affidavit for Mechanics Lien must be filed with the County Recorder where the improvement is located. A failure by the lien claimant to file the lien affidavit in a timely
manner will waive all lien rights. The lien claimant must file its affidavit within the proper time period even if it was not required to serve a Notice of Furnishing. The limitations period begins to run from the date on which the last labor, work or materials were provided for the project. For private projects, the Affidavit of Mechanics Lien must be filed within 60 days for one- or twofamily dwellings and condominiums, 120 days for oil, gas and injection wells, and 75 days for
everything else.
Beyond the above, the lien affidavit must contain all information required by
statute in order to be effective. For public projects, the lien claimant must file an Affidavit for Claim within 120 days from the last date labor, work or materials were provided. In a public project, the lien is against the undistributed construction funds in the possession of the public owner as opposed to a lien against real property. Therefore, if all the construction funds have been paid out, the lien has no value. Once the lien affidavit has been properly filed, a copy of the affidavit must be served on the owner within 30 days to perfect the lien. A perfected mechanics lien on r eal property will last 6 years. 2. Enforcing Mechanics Liens
Even if a contractor has secured a valid mechanics lien, this does not guarantee that payment will be immediately forthcoming. Lacking voluntary payment, enforcement of a
mechanics lien must be done through a foreclosure action brought by the lien claimant. This is a time consuming and expensive process, and if the lien amount is small, a foreclosure action may not be financially warranted. Even if there is no intent to pursue a foreclosure action,
however, the lien may nonetheless have significant value in obtaining payment. For example, an owner or construction lender may exert significant pressure to have the lien removed, and this can give the contractor valuable leverage in obtaining payment. Further, if another contractor
decides to pursue a foreclosure action, any asserted lien rights will be considered in the resolution of that dispute.
Notwithstanding the above, there are methods available to counter a mechanics lien. An owner, for example, can file a Notice to Commence Suit, which requires the lien claimant to initiate suit within 60 days. If an action is not brought within this time, the lien is voided. In a low dollar claim situation, therefore, the contractor may be unwilling to file a foreclosure action and will lose its lien rights. In addition, a mechanics lien can be bonded off property. While this removes the lien, it does ensure a source of payment and allows the contractor to initiate litigation against the proper party without the complications of a foreclosure action. In general, mechanics liens can be extremely useful in pursuing a claim, even if there is no intention to file a foreclosure action. It can provide significant leverage and force stubborn
parties to the table to discuss disputed claims. Nonetheless, the process to assert a viable lien is technical, and consequently great care must be taken to meet all the procedural requirements contained in Ohios lien statute. C. Notice to Construction Lenders
Unless there is a specific obligation in the contract documents, a contractor has no duty to notify a construction lender in the event of a dispute. Nonetheless, as already mentioned, placing a construction lender on notice of a mechanics lien or payment dispute can provide the contractor added leverage in pursuing a claim. A construction lender will clearly want to avoid liens being placed on a project that might impact its interests in the property. In some
circumstances, the lender may even withhold loan funds until the lien is removed. Obviously, in this type of situation the contractors position with respect to its claim is greatly enhanced. Consequently, placing a construction lender on notice of a pending lien or claim may be warranted under certain circumstances.
D.
Private Payment Bonds
In many construction projects, the owner may require the general contractor to post bonds to guarantee completion of the project and payment to subcontractors and suppliers. Of course, this requirement can also be placed on subcontractors. Public projects are more likely to require contractors to post bonds, but bonds can be required in private projects as well. In private construction projects, the most common types of bonds are performance and payment bonds. A performance bond guarantees that the contractor will perform the work in
accordance with the construction contract and related documents, thus protecting the owner from financial loss up to the bond limit if the contractor fails to fulfill its contractual obligations. In contrast, a payment bond guarantees that subcontractors and suppliers will be paid for materials and labor furnished to the contractor. The payment bond will also protect an owner from
mechanics liens by paying lien claimants any amounts owed. If the surety is required to pay any claims under its bond, it will seek reimbursement from the contractor that originally obtained the bond. Contractors seeking compensation under a payment bond must understand the claims procedures set forth in the bond. For example, a bond may require that claims be submitted
within a certain time after the claim arises. If the contractor fails to follow the claims process, its claim may be rejected. In addition, the contractor should be prepared to provide documentation in support of its claim. If proper documentation is not provided, the claim may be denied. Even when the claim is properly documented, the suretys review process can be lengthy, particularly if there is ongoing litigation or arbitration. In that event, payment of the bond claim may be
substantially delayed.
Regardless of the potential for litigation, however, the contractor must
understand the claims process and document its claim. E. Retainage of Public Works Projects
In Ohio, contractors involved in public works projects are subject to certain retainage requirements. See Ohio R.C. 153.12. Ohio requires public owners to withhold a portion of the contract price from the contractor until the project is completed. In public projects, only 92
percent of the estimated contract price can be paid to the contractor until the project is 50 percent completed. After the contract is 50 percent complete, the contractor can begin to receive 100 percent of the payment due on future progress payments. Under the statute, when the major portion of the project is substantially completed and occupied, or in use, or otherwise accepted, and there exists no other reason to withhold retainage, the retained funds will be dispersed to the contractor, less only that amount necessary to assure completion. The remaining funds must then be paid within 30 days from
the date of completion or either acceptance or occupancy by the owner. See Ohio R.C. 153.13 and 153.14. From the claims perspective, retained funds can provide a source of payment through a mechanics lien. As previously discussed, a mechanics lien in the context of a public project
will only attach to unpaid funds for the project, and these funds will be withheld by the public owner until the dispute is resolved. F. Bonds on Public Works Projects
In Ohio, there are a number of statutory provisions pertaining to bonds on public works projects. Most governmental entities require that a bid guaranty be included with each bid for
work on a public project. Bid guarantees may be in the form of a bid bond for the full amount of the bid, and the purpose of the bond is to ensure that the bidder executes a contract. Once a contract is entered into, the contractor must execute a contract bond for the full amount of the contract. The contract bond will guarantee the contractors performance of the contract and will ensure that all subcontractors and suppliers are properly paid. The general considerations Again, the
applicable to private bonds are equally relevant to bonds on public projects.
contractor should be aware of the claims process to properly pursue payment under the bond and document all claims. G. The Miller Act
The Miller Act is a federal statute that requires contractors on federal construction projects to provide payment and performance bonds to protect the interests of the government and those supplying labor and materials under contract with the general contractor. The Act
governs all contracts awarded by the United States in excess of $100,000.00 involving the construction, alteration, or repair of public buildings. Under the Act, the general contractor must provide a performance bond for the benefit of the government and a payment bond for the benefit of the subcontractors and suppliers under the general contract. It is the responsibility of the contracting officer to set the bond at an amount that adequately protects the government. The amount of the payment bond required is set by
statute and depends on the size of the contract. The protections of the Act do not extend to remote participants in the project. The Act only protects persons who have a contract with the prime contractor and persons who have a contract with a subcontractor. Third-tier subcontractors and suppliers are considered remote and
are therefore not covered by the Act. Filing and notice requirements are imposed on those who wish to avail themselves of the protections of the Act. 1. Miller Act Notice Requirements
Contractors that intend to make claim on a payment bond must adhere to certain notice requirements under the Act. First-tier subcontractors and suppliers are not required to furnish
notice. Claimants in contract with a subcontractor to the prime contractor must provide written notice to the prime contractor within 90 days from the date the claimant last provided labor and/or materials for which it is making a claim. The notice must also indicate that the claimant is looking to the prime contractor for the payment of its claim. 2. Miller Act Filing Requirements
The Act regulates when a party can file a claim on the payment bond posted by the prime contractor. Under the Act, a party may not file suit attempting to recover under the payment
bond until 90 days after the party last furnished services or goods. This requirement is strictly construed and failure to adhere to this provision of the Act will result in the partys claim being dismissed. Additionally, the Act places an outside limit on the time a party has to file an action. Any suit attempting to recover from the payment bond must be initiated no later than one year after the party last provided services or goods. As this claim presents a federal cause of action, litigation under the Act must be filed in the federal court where the project is located. A second-tier subcontractor asserting claims has an extremely strategic position under the Act. Absent the Act, the prime contractor would be insulated from such claims. The Act allows the second-tier subcontractors to force the prime contractor into court, and consequently the prime contractor will most likely apply significant pressure on its subcontractor to resolve the
dispute. Further, in the case of insolvency, the Act provides an additional source of recovery for contractors.

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PAYMENT ISSUES ON CONSTRUCTION PROJECTS The construction industry, like all businesses, revolves around a very simple concept

has not been filed, then a Notice of Furnishing is not required.

Private Payment Bonds

Regardless of the potential for litigation, however, the contractor must

applicable to private bonds are equally relevant to bonds on public projects.

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