Collecting What’s Owed You
In an economy where money is tight, contractors can't take getting paid for granted anymore. They have to work at it. "It is absolutely more challenging getting paid," said Joe Kiepp, president of Chesterfield-based River City Drywall.
Because of clients ignoring invoices, "In the past year I've spent more money on attorney's fees than in the 14 previous years combined," said Tim Wies, president of T.J. Wies Contracting in Lake St. Louis. But attorney's fees are just the tip of the iceberg.
Savvy business operators such as Kiepp and Wies have instituted new policies and procedures that help them collect from clients and, if necessary, pave the way for successful court cases. Both companies have accelerated their invoicing, sending bills out the day or week the work is completed instead of waiting for the end of the month. Both have someone on staff responsible for collections.
River City Drwyall also:
- sends out overdue invoices after 30 days,
- sends out payment reminders twice a month instead of every 30 days,
- has someone call a client after an invoice is overdue, because sometimes phone calls work better than letters, and
- "I will personally call the owner," Kiepp said.
- Check the databases of the St. Louis Post-Dispatch ( http://www.stltoday.com ) or the St. Louis Business Journal ( http://stlouis.bizjournals.com ) to see if there are any articles about the company not paying its debts
- Check the Missouri Secretary of State's website ( http://www.sos.mo.gov ) to verify the that a corporation is in good standing
- Check Missouri's judiciary website ( http://www.courts.mo.gov/casenet ) to see if a company has been sued or brought suit, and the nature of the dispute.
But before collection actions, before even the contract, comes the vetting. River City Drywall works for a lot of local and privately-owned companies. One of the new practices Kiepp initiated was to subscribe to, and read, a periodic credit report that lists all the mechanic's liens, tax liens, and lawsuits filed locally in the building and construction industry. "When we see a contractor on the list several times, we chose not to do business with them, and it helps us prepare if we see one of our customers on it," he said.
A company that makes it past the credit report still has to fill out a customer information form giving River City Drywall references and permission to contact their lender and title company.
Michael Wolf, an attorney specializing in construction law at Reizman Berger P.C., called such practices obvious, but added that too many subcontractors have overlooked them.
"Before you go into business with someone, shouldn't you know as much as you can about them?" he said.
"There are AIA and ConsensDocs contracts that allow lower tiered contractors to ask for the upper tier's liquidity," Wolf said.
More information, he said, can be found on the Internet:
A contractor who passes River City Drywall's vetting still isn't cleared to hire the subcontractor. In another new wrinkle to River City Drywall's business practices since the economy went south, "we now require a personal guarantee from the owner of the company," Kiepp said.
That's a practice Wolf approves of when dealing with a new or unknown company. "When attempting to collect a debt, a guarantee often means the difference between success or failure when the entity primarily responsible for the debt is out of business or insolvent," he said.
Wies has another practice that reduces his financial risk on private jobs: he furnishes the owner a retention bond as a substitute for the owner holding retention. On many private jobs, the owner withholds a portion of each payment, maybe ten percent, until the job is completed, supposedly as an incentive for the contractor to finish the work. Under Missouri law, however, if a contractor chooses to post a bond, the owner cannot withhold or retain any portion of payments due for the purpose of ensuring that the contractor completes the job.
"On a private job, you might get three-fourths of the way through when the owner stops paying," Wies said. Without the retention bond, "you'd be out your last payments and your retention. By putting up the bond, the owner can't hold back retention, so it protects you from losing the retention when the owner runs into financial problems," he said.
Even with vetting, reminders of personal guarantees, and quick invoicing and phone calls, there are times when owners run into financial trouble and stop paying their bills. Then it is time to file a mechanic's lien. Kiepp estimated that River City Drywall has filed over 20 in the last two year.
"It is important to have an attorney file your mechanic's lien," Kiepp said. "Some people try to save money by doing it themselves, but if it is not done correctly, the defendant's attorney can get it thrown out," he said.
"The biggest thing you can do (to collect what's owed to you) is don't let your lien rights expire," Wies said.
"The most important thing to do is keep an eye on the calendar and not let the lien time run out," he said. "You have six months from the last day of work, but determining the last day can be tricky (going back to repair something that was defective doesn't count), so if there is any doubt, err on the side of earliness and caution," said Richard Stockenberg, attorney with Gallup, Johnson & Neuman and counsel for the Midwest Council of the American Subcontractors Association. By the way, your last day worked has nothing to do with when you sent out your final invoice.
And don't wait until the final week to ask an attorney to file a lien. Subcontractors and suppliers have to file notice of intent to file a lien on the property owner at least 10 days before filing the lien. It can be difficult to find the real owner, Stockenberg said, and if there are multiple owners, all of them have to be served. If there are 100 partners, all 100 partners have to be served. Lawyers will do this service, but it takes time.
"I typically like to get involved six weeks before the deadline," said Stockenberg.
"To this day, I am surprised when I get a call from contractor, who says that someone owes him money, but he doesn't know the requirements of Missouri's mechanic's lien law. To not know the deadlines is contractor malpractice in my view," said Wolf.
Wolf said the first step for a contractor is to get training in lien law just as he or she would get training in a trade. That means learning such things as learning how a lien waiver affects him; what to do if a higher-tiered contractor tries to get him to sign an enhanced lien waiver; what to put in a credit agreement; and what interest to charge for late payments. The American Subcontractors Association and other industry associations have programs to educate subcontractors and specialty contractors about lien law.
After learning what they are entitled to, then contractors can worry about how to collect.
"If you are not preparing yourself to understand the contract you sign, do you really want to pay an attorney to sue to enforce it, and even if he can, do you want him to sue if you can't collect?" Wolf said.
A judgement, "it is just a piece of paper, if you can't collect on it, what is the point?" he said.
In 2003, Clayton-based Behr, McCarter & Potter, P.C. launched a Judgment Collection Program designed specifically to recover judgments for contractors, commercial real estate companies and construction-related clients. Principal Anthony Behr said that since its inception, the program has recovered more than $10 million owed from court judgments.
"We have found that if a contractor files a mechanic's lien within six months, we recover 85-90 percent of the money owed to him," Behr said.
"The only thing we charge is any garnishment fees we send out on their behalf. They don't have to do any work to collect; they get out their file and any contact information they have. We go to Internet and try to find any properties, banks accounts, or judgments they have in their favor and we file garnishments. On any judgments that are less than five years old, we get 1/3; anything 5-10 years old, we get 40 percent and we send monthly statements to contractors for the garnishments we've made," he said. "If they already have a judgment, they don't pay anything up front and if we don't collect anything, they don't owe us a dime, except for a garnishment fee that is usually less than $100," he said.
"It is hard to believe how many judgments there are out there that don't get collected," said Joseph Blanner, a partner at Behr, McCarter & Potter. "Most contractors have several judgments in their favor that they haven't collected. This could be another revenue stream for them," he said.
For River City Drywall, liens rights are invaluable. Remember those 20 liens they filed in the last two years? "We've been successful in collecting every time, and collecting 100 percent of the amount of owed," Kiepp said. "I have conceded the interest with a few of them, but I have not taken anything less than 100 percent of the invoice amount," he said.
The key elements of River City Drywall's winning strategy are a willingness to wait out defendants and an attorney who specializes in liens. "I had one lien I filed for $36,000, and I wound up getting $42,000, because I got 100 percent of the principal and interest," Kiepp said.