Home Contractors: What to Do About Non-Paying Homeowners

Home improvement jobs take time, skill, and effort. If you're a contractor, you've probably spent weeks or months coordinating with a homeowner, hiring suppliers and subcontractors, and doing physical labor. It can be extremely frustrating, then, when that homeowner does not pay the bills. What steps can you take both in advance and after the work is underway to make sure you get the money you're owed? Here, we'll discuss:

• arranging for some upfront payments
• confronting the homeowner about the balance due
• filing a mechanics' lien on the property, and
• suing the homeowner for breach of contract.

How to Arrange Progress Payments for Home Improvement Work

Most home contractors ask, in negotiating the contract for work, for some amount of money to be paid up front. Progress payments are an accepted and important "best practice" for mitigating the risk of sinking time and money into the job for zero reward.

Such payments could be structured in a number of ways. If, for example, the project will take about one month to complete, you could divide the cost and ask the homeowner to pay in equal installments on four consecutive Fridays. Another option would be to base your payment on hitting certain construction goals (for example, when you install the tiling in a new kitchen, you'll receive a certain percentage).

Alternatively, you could ask for 50% of the cost up front, before you do any work at all, and then the remaining 50% upon completion. Or you could adjust those percentages in a way that accommodates both of your risk tolerances.

If this is your first project as a contractor, the homeowner might want to hold 75% until completion; if the homeowner seems likely to default, you might demand 75% up-front.

Progress payments like these are helpful to contracting operations of all sizes, but especially smaller businesses, so as to minimize the potential for a homeowner to refuse to pay after work has been done at your expense.

Talk to the Homeowner About the Balance Due

If the homeowners have paid you nothing, or still owe you a balance at the end of the job, you need to speak with them to clarify the matter. Are they withholding payment because they're simply trying to negotiate a better deal for themselves after the job is complete? Are they withholding payment because they're alleging you did something wrong? Are they withholding payment because a subcontractor or supplier is claiming nonpayment?

If it's the first situation (simple dishonesty and negotiation tactics) consider whether you can afford to be paid less than 100% of the contract fee. It might be less expensive to "take a haircut" and accept a portion of what they promised to pay, rather than hiring a lawyer to fight over the precise balance. But see below for other possibilities.

If it's the second situation (an allegation that you did something wrong) take the high road. Most often, homeowners will withhold payment when they perceive that you didn't do what you promised, took longer than you said you would, used inferior materials, or somehow failed to meet expectations. Offer to visit the home and inspect the situation. If you really did make an error, see if you can correct it without expending a great deal of additional resources, or perhaps compensate by doing other handy work around the house. Good word of mouth from a consumer who sees your good faith effort to correct the situation will surely pay dividends for your business.

If it's the situation of an unpaid supplier or subcontractor, put yourself in the homeowner's shoes. A homeowner hires a contractor to handle a job. Whether that's a kitchen remodeling or a garage renovation, homeowners generally do not want to be annoyed with managing different down-chain employees. However, these same folks can cause problems for the homeowner if they're unpaid, notably by filing a lien on the home. Generally, it's your responsibility to manage and pay any down-chain subcontractors or suppliers that you've retained.

File a Mechanics' Lien on the Property

While sometimes you'll be able to correct whatever the homeowner's complaint is, other times, their feelings or expectations, or the amount they're withholding, will be unreasonable. Sometimes you'll have no control over subcontractors and suppliers who are annoying the homeowner.

In these situations, the remedy for contractors is generally to file a lien against the home. A lien (sometimes called a "mechanics lien") is an official filing with the county records office that puts the world on notice of your claim against the homeowner. It shows your "security interest" in the home.

Liens are a significant annoyance to homeowners, because it makes it extremely difficult for them to sell or refinance their property, since buyers and lenders typically require clear title. Often, merely filing a lien will be enough to incentivize the homeowner to settle with you (sometimes called "satisfying the lien"). If they still refuse to settle, you can foreclose on the lien; that is, sue the homeowner for the amount you are owed.

Although liens tend to be simple forms to file, county clerks are often meticulous about their formatting requirements. You'll probably need to specify your dates of work, amount of money claimed, and any other contractors on the project. An error in the formatting of the lien document can render it unenforceable. Check with your local county clerk's office to see whether it has a set form for mechanics lien filings.

Sue the Homeowner for Breach of Contract

Even without a lien, a contractor can in many situations sue a homeowner for simple breach of contract. This lawsuit can be brought in regular civil court or in small claims court, depending on the amount in dispute (disputes that are for less than a few thousand dollars will usually be directed to a dedicated small claims judge).

To prevail on your lawsuit, you'll need to establish that the homeowner violated the terms of the contract despite your having performed the agreed-upon work. Key pieces of evidence might include:

• a copy of the executed contract between you and the homeowner
• before and after pictures of whatever work you completed
• subcontractor invoices or materials expenses you've incurred in the project, and
• demands for payment that you've sent the homeowner that have gone unanswered.

These sorts of documents would help to establish that the homeowner breached the contract between you.