At some time or another almost every contractor ends up with unpaid work. A decision must be made on how to handle each unpaid receivable. Sometimes, instead of making this decision based on the circumstances of the particular unpaid job contractors will decide whether to collect based on how their business is doing on other jobs. If business is generally good and other jobs are paying then a loss will simply be “written off.” If business is slow then a contractor may try to collect even if it doesn’t make good business sense.
How to analyze a collections decision. The decision on whether to collect from a property owner should be based in terms of the following basic business principle: Is the collection investment likely to bring a return that is better than if the investment was spent elsewhere? In effect, how much investment is required and what is the likely gain? In deciding whether collection is a good investment the following five factors should be considered: (1) The total amount being claimed, (2) whether this amount is disputed, (3) whether attorney fees spent can be added to this amount, (4) whether there is strong supporting evidence, and (5) whether the mechanics’ lien procedures were correctly followed.
What is the total amount claimed? It seems like common sense that the larger the amount being claimed the more that stands to be gained. But, a large claim does not always mean collection will be a worthy investment. Large claims often mean the owner will be willing to spend more money to challenge it.
It might seem sometimes like owners know that a small claim is not worth pursuing for the contractor. If the amount that is unpaid is less than $5,000 the contractor can gamble on Small Claims Court but this requires time in preparation and the appearance. This investment cannot be recovered. The claim can be filed in Superior Court but there is a filing cost of $200 and usually the cost of an attorney. The Superior Court does not have to award attorney fees to the prevailing party even if the contract requires it if the claim could have been brought in Small Claims Court. A well tailored arbitration agreement (in addition to the mandatory arbitration language) requiring that actual attorney fees incurred be awarded might be the best scenario for a worthy small claim.
Can attorney fees be added? A signed contract with language to the effect that if there is a dispute the prevailing party can get his attorney fees reimbursed by the loser is enforceable for amounts over $5,000. The actual amount awarded is up to the Court. A collecting contractor is the prevailing party if he recovers any money at all. (Unless there is a cross-claim and the owner recovers a greater amount on this.)
If the owner and contractor reach an agreement before trial or arbitration there won’t be a prevailing party determined. Even so, an attorney fees clause can be beneficial because it provides a good bargaining chip for a claim that is strong otherwise. An owner will not want to pay for the contractor’s attorney fees and will be more likely to settle favorably if it thinks it will lose the claim.
Is the amount disputed? Will the amount that the owner is being asked to pay be disputed? If the only reason that an owner has not paid is because of poor financial management the claim may be uncontested. If the owner has complaints about the work or that the price was more than agreed then more time will have to be spent proving the claim. The more time that must be spent proving that the contractor correctly did the job for the price agreed the worse the choice to collect looks.
Is there good supporting documentation? The strength of the supporting evidence is the heart of a claim for payment. A contractor must be able to show there was an agreement for work that was fully and correctly performed for the agreed price.
The more documentation that is available the better. A detailed written contract is ideal for starters. But, even payment for work that was done without a written contract can be collected and should not be just written off.
Other evidence that is helpful includes saved letters, photos, daily logs, schedules, and other business records. What cannot be shown directly might be able to be shown using circumstantial evidence such as past business relationship and generally accepted trade standards. The bottom line is the more difficult a case is to prove the bigger the investment a contractor will have to make in order to collect. If parts of a claim don’t have good supporting evidence a contractor can expect that a settlement or judgment will not be as favorable.
Can a judgment be collected? A big factor in deciding whether to enforce payment for work depends on whether the contractor can actually collect on a judgment. The judgment is just worthless paper if the owner has no money, attachable income, or assets that can be sold.
The best way to force an owner to pay a judgment is a mechanics’ lien. A mechanics’ lien benefits a contractor who has improved an owner’s property because it allows the contractor to bypass the debtor-protection laws. Debtor-protection laws prevent a contractor from selling a debtor’s home even with a court judgment unless the debtor has a certain amount of equity in the home. A mechanics’ lien is a constitutional exception to these protections and attaches to the property as security in line with any mortgages the owner might have. The lien can be foreclosed and the property sold to pay the debt, even if all of the debt will not be paid for by the sale. Owners will rarely allow this to happen and will pay the debt first.
Because a mechanics’ lien is such a powerful tool the law requires contractors to strictly follow the procedural rules. These rules include serving preliminary notices, providing mechanics’ lien notices, recording liens at the county recorder’s office before deadlines have passed, and filing foreclosure actions within ninety days from the recording date.
Conclusion. Every unpaid invoice should be analyzed with these considerations in mind. If the contractor has kept a job file with good records and has followed the mechanics’ lien procedures collection can be a very good investment because the amount of investment and risk will be small and the likely return large. If a particular payment claim seems like a poor investment then perhaps a contractor should consider improvements to his contracting procedures. If nothing else good contracting procedures mean less unpaid work in the first place.
These are just some considerations. A full analysis requires a consultation with an attorney. Other considerations might include whether the owner will file bankruptcy, how the bankruptcy would affect a mechanics’ lien, and whether the owner is going to lose the property in a foreclosure.