How to Collect Your Money: Bonding and Retainage Seminar

Beth began the seminar by addressing the “Fairness in Construction Financing Act,” which provides subcontractors with significant assistance in procuring payment, particularly retainage, on many types of private construction projects. The Act, which applies to private commercial and industrial construction contracts valued at more than $25,000.00, as well as residential contracts with more than four units, gives courts the power to award a claimant its attorney’s fees, interest, and even punitive damages if it is found that payments were “unreasonably withheld” from the subcontractor or supplier or were withheld in bad faith. Pursuant to the Act, project owners must pay amounts due for labor and materials within 30 days after receiving a written payment request. The Act also requires that general contractors pay for labor and materials within 30 days after the general contractor receives payments for such labor and materials from the project owner. Should a general contractor fail to make payment to a subcontractor within 30 days of receiving payment for the subcontractor’s work from the project owner, the subcontractor should set forth its claim against the general contractor through a demand made by certified mail. Ten days after the receipt of the demand, the general contractor shall be liable for interest on the amount due at the rate of 1% per month. In addition, the general contractor must place the funds, plus interest at the rate of 1% per month, in an interest-bearing escrow account. Significantly, the Act also establishes a subcontractor’s right to sue a project owner directly for late payments after providing notice of nonpayment to the owner. This provision is significant because it eliminates the problem encountered by many subcontractors with so-called “pay when paid” clauses.

Paul spoke about contract language that subcontractors may wish to incorporate into their agreements with customers, clients and project owners, which provides the subcontractor with significant leverage in the event of a payment dispute. These contract clauses include personal guarantees, attorney’s fees and interest provisions, clauses identifying bank accounts and other collateral, and “commercial waiver” provisions, which permit subcontractors to attach property without a court order. Paul also spoke about the process of filing and foreclosing mechanic’s liens on private property in Connecticut. In order to be valid, a mechanic’s lien must be filed within ninety (90) days of the last day the lien or performed services or furnished materials. However, it is important to remember that mechanic’s liens provide an unpaid contractor with a potential source of security only. A mechanic’s lien is therefore only as good as the underlying claim, and is limited by the amount of available equity in the property that is the subject lien. Where a subcontractor anticipates counterclaims or backcharges by an owner or other contractor, the mechanic’s lien right is equally subject to those counterclaims or backcharges. Moreover, where the property is already encumbered by other liens that have priority over the mechanic’s lien, there may be no equity in the property for the lien or to foreclose. It is important to note that even where such limitations exist, however, the mechanic’s lien can still be an extremely effective remedy. For instance, when a subcontractor has not been paid, the filing of a mechanic’s lien is often a useful tool by which the subcontractor can enlist the owners’ support in forcing a reluctant prime contractor to make payment.

Beth concluded the seminar by speaking about payment bonds. Payment bonds are required on public projects in Connecticut, and are sometimes also furnished on private projects. If the bond is issued in connection with a public project, Connecticut General Statute § 49-42 governs the claims process. Under §49-42, any person who has not been paid for labor or materials within 60 days of when either payment was due, or from when the work was performed, must serve a notice of claim upon the surety, with a copy to the principal. The claimant has 180 days from the date when payment was due, or in other cases when he last performed work or supplied materials, in which to serve said notice by registered or certified mail. The claimant has one year from the date when payment was due, or in other cases when he last performed work or supplied materials, in which to file suit under the bond per § 49-42.

By utilizing these remedies, a subcontractor greatly increases his changes of receiving payment for work performed on private and public construction projects in Connecticut.

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Michelson, Kane, P.C.

At Michelson, Kane, P.C., our goal is to provide our clients with the advice and representation they need in order to meet their legal and practical objectives. Our team is experienced, collaborative, knowledgeable, and friendly. Several of our award-winning attorneys play key roles in construction organizations, and even help to shape the laws that affect the construction industry in Connecticut. Let us put our experience to work for you.