Contractor Refuses to Pay Subcontractor: Everything to Know
When a contractor refuses to pay subcontractor, the subcontractor has grounds to pursue legal action to collect the money that is owed to them.3 min read
2. When Can Contractors Withhold Payment From Subcontractors?
Updated June 18, 2020:
When a contractor refuses to pay subcontractor, the subcontractor has grounds to pursue legal action to collect the money that is owed to them.
Subcontractor's Rights When a Contractor Won't Pay
Building projects normally involve multiple subcontractors such as:
Usually, the main contractor is responsible for coordinating and supervising all of the subcontractors. One of the contractor's responsibilities involves making sure each of the involved subcontractors and suppliers is paid for their work. In the event that a subcontractor isn't paid, they may have grounds to pursue legal action against the contractor. Usually, though, it's easier to pursue action against the owner of the property than it is to go after the contractor.
If a subcontractor doesn't get paid, they can file what is known as a "mechanic's lien" against the property they've been working on. The first thing they'll need to do is notify the owner of the property. If the owner then fails to pay, the subcontractor can then file the lien. A mechanic's lien can be used to foreclose on the property in question as a means to collect the money the subcontractor is owed when the property sells.
In cases like this, it doesn't matter whether or not the owner of the property has paid the contractor in good faith. There are laws in place that are designed to protect a subcontractor and make sure they get paid, even if that means that the property owner has to pay more than once for the work that's been done.
An alternative to filing a mechanic's lien is to go after the contractor directly. Subcontractors can also report contractors to the appropriate state licensing board if they fail to pay. Exact rules and penalties associated with failing to pay a subcontractor will vary from one state to the next. For example, in the state of California, a subcontractor can sue for the following:
- The original amount they are owed
- Legal fees
- Penalties of up to two percent of the original bill
Subcontractors are not restricted to taking such action only when they aren't paid. They can also pursue similar action when a contractor delays in paying a subcontractor for longer than the state allows.
When Can Contractors Withhold Payment From Subcontractors?
Contractors normally bid on large projects and then hire subcontractors to perform a significant portion of the work to be performed. Subcontractors usually specialize in specific areas such as:
- Electric work
If you're a contractor, it's only a matter of time before you end up working with a subcontractor that doesn't perform their portion of the job according to the standards of the contract you both agreed to. Payment can be withheld from subcontractors under very limited conditions. If you're not absolutely certain that your reasons for withholding payment are legal and legitimate, the subcontractor may be able to take action against you and win.
In most cases, you can't legally withhold payment from a subcontractor when the job you've been contracted on fails to pay on time or, even worse, doesn't pay at all. You're still responsible for making sure your subcontractors are paid. Subcontractors will likely be able to place a mechanic's lien against the property in question to recover the money they are owed which, in turn, could end up costing you more money. To legally be able to withhold payment in these scenarios, your contract needs to include a "pay-if-paid" clause that specifies that you are not required to pay subcontractors if you yourself don't get paid for the job.
In the event that a subcontractor doesn't perform to the standards of the contract, you are required to pay any current payments for work they have completed. However, you are not required to pay them for the remainder of the job. Keep in mind, however, that this rule can only be applied if the subcontractor is at fault for the poor quality of work. If substandard work was performed due to some contributing factor that was beyond of the subcontractor's ability to control, you will likely still be required to pay them.
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