DennisBeaverApril 12, 2010 (Original publish date) • By Dennis Beaver

Today we’re wrapping up our look at the world of contractors. We’ve examined “surety bonds,” which assure little beyond disappointment and headaches, as well as shown how to check out a contractor’s past. This time: signs that your contractor is in financial trouble.

Be a good listener

“A contractor’s money problems often become his customer’s as well. Frequently, warning signs are apparent within days of the job starting, but go unseen, unheard,” Los Angeles-based construction law attorney Kirk MacDonald observes.

“Especially with a relatively small job, such as a bathroom remodel, try to be present, listening to conversations. You don’t want to hear that employees or subcontractors are not being paid, or not being paid on time.”

“A great deal of information can be gathered just by listening – information which may prove useful later on – such as other jobs the contractor is working on. If his employees or subs seem angry, or not wanting to be on your job, the reason is almost money.”

Trouble with his employees or subcontractors

“One of the worst signs is when employees or subcontractors ask you to pay them directly. Worse yet, when the contractor needs an advance so he can purchase materials, or to pay for subcontractors,” he cautions.

“Another indication that trouble is headed your way would be subcontractors who are not showing up or progress on the job has been delayed. It could be they were not paid, or simply a lack of coordination by the general contractor. If this happens, speak with the subs directly to find out what’s going on. That’s why it is so important to have detailed contact information on everyone involved with your job.”

“Timing is critical. You can’t rely on a handshake. Your written contract must have specific times for commencement and completion, including what are referred to as Milestone Points; After one month, we should have this much done, two months, this and so on.”

Understanding liens – you don’t want to pay twice

The law has significant protection for people who have provided their labor or material to improve property. It’s called a “lien.”

This four-letter word has caused a lot of people to use other four-letter words because they did not know how to protect themselves from a contractor who took their money and didn’t pay the people or companies who supplied labor or material for the job.

Also known as a a mechanic’s lien, where subcontractors or material suppliers have correctly followed lien law procedures, if the general contractor fails to pay them – even when he was paid by the customer – the property owner will be required to pay twice or could lose the property through a forced sale.

“Avoiding this isn’t difficult, and is an area where you can be pro-active,” MacDonald stressed. “If you receive what is called a 20-day preliminary notice from a subcontractor or supplier, you’ve got to know what to do.”

“It is important to understand that receiving that notice does not mean your contractor has done anything wrong at all. It is a prerequisite to protecting suppliers or subcontractors in the event they are not paid. In reality, receiving a 20-day preliminary notice should be seen in a positive light,” MacDonald said.

In fact, while getting one or more of those notices will send blood pressure skyward, they are in fact a good thing. They allow the property owner to start tracking each supplier or subcontractor and verify that they’ve been paid.

Proof of payment is made through another document, known as a lien release. MacDonald set out this common series of events common with 20-day preliminary notices:

First, you receive the 20-day preliminary notice of lien from a supplier or subcontractor.

Second, the contractor asks for a progress payment from you. Before you pay, ask for lien releases from those suppliers or subcontractors, signed by them, stating they have been paid by the contractor.

At times, the contractor will also ask for payment from you and promise to return with the lien releases. This is common and nothing to worry about, as long as you issue a joint check, payable to the contractor and subcontractor or material provider.

When to pull the plug on a contractor

“If milestone points have not been met, or other significant failures to perform occur, speak with an attorney before terminating the contract, even for a small job. And that’s why, even if it adds something to the cost of any job, one should at least consider a consultation with a construction law attorney. It could be money well spent,” MacDonald said.

Good advice.

Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.