A subcontractor not paid by contractor can be a problematic situation as you are benefiting from work that you paid for, but the actual laborers were not paid. There are many ways to prevent hiring a contractor that does not pay their subcontractor and protect yourself in the event it does occur. When working with a contractor:

  • Be sure they are insured and registered.
  • Ask for and verify references.
  • Stay wary of contractors with substantially lower bids.
  • Begin your relationship with a strong contract that has a payment agreement for milestones.
  • Make sure that your payment schedule is extremely detailed and spread throughout the project.
  • Do not provide a large deposit, so you don't have as much to lose if problems arise.
  • Have lien waivers in place that state that subcontractors need to complete their work and receive payment.
  • Exercise caution with contractors who will ask for payments earlier than the payment schedule allows.
  • Be sure that all materials have been ordered by the contractor.
  • Regularly check in with your subcontractors and the suppliers to make sure they are being paid.
  • If you cannot make physical checks yourself, hire a construction manager to oversee things.
  • Don't ignore red flags, address them with your contractor immediately.
  • Include in your contract the right to terminate the agreement if the job is not being performed properly.

What are the Legal Penalties?

There are legal penalties that a contractor may suffer if they fail to pay a subcontractor. Under the law, a contractor is required to pay their subcontractors within ten days of the contractor's receipt of a progress payment unless they have an agreement in writing indicating otherwise. If there is a good faith dispute over a portion of the amount due form the progress payment, then the contractor can withhold up to 150 percent of the disputed amount.

If a contractor violates this law, they can be subject to disciplinary action such as a penalty that the contractor must pay the subcontractor for two percent of the amount they are due, to be assessed each month that they are late with the penalty. When deemed that the contractor wrongfully withheld funds, the prevailing party can be awarded attorney fees and costs.

Exceptions

There are exceptions to this statue where payment and penalty may not be applicable. Some of the exceptions include:

  • If a contractor assigns out work without the city's consent
  • The contractor was not identified in the prime contract
  • The subcontractor was not listed in the contract.

Section 10262

This section applies to all private and public works of improvement and lays out the statute that a contractor must pay their subcontractor within 10 days of their receipt of the progress payment, to the extent of the subcontractor's interest. If the contractor acts in the diversion of payments for fails to account for the application of payments will constitute as grounds for disciplinary action. The contractor can be disciplined by the Contractors' State License Board and subject to a penalty payment.

The provisions in this section apply to any contract after January 1999 and can alter the cost-benefit analysis for parties that are in dispute. Under the statute attorney's fees can be awarded, therefore making a small claim worth pursuing for the subcontractor. Additionally, a 24 percent per annum increase in the amount of the claim, payable to the subcontractor, along with the sums that have been deemed rightfully due, make cases worthwhile. This also makes not paying a subcontractor a costly mistake for a contractor, therefore, deterring the action.

Penalties

Section 178 of the 3rd Building and Construction Contracts allows a licensee to be disciplined for a willful or deliberate failure to pay money to their subcontractor when due, for any materials or services that were rendered in the connection with an operation performed by the contractor. The licensee may also be disciplined for falsely denying that an amount is due as well as any attempt to defraud the persons who provided them with materials or services. When violating this section, a licensee could face license suspension or removal as well as incur a two percent penalty.

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