By Dominic J. Maltese, Jr., CPE, ASPE
Many contractors in the industry today are aware of scams being conducted in the construction industry by unscrupulous consumers. But recently a few “suave” business owners are engaging in what I call “legal larceny” and for the betterment of our industry, it must be stopped!
The construction industry uses bonds to protect the consumer from contractors that do not complete projects. In turn, builders and contractors use liens to protect their rights to collect on a project. As you know, every State permits a person who supplies labor or materials for a construction project to claim a lien against the improved property. But this is where the rub is—the lien laws in Michigan lack any real “teeth” and it can be very costly to the builder and contractors to use for collecting their money in a timely manner or at all. The sad part is the unscrupulous customer knows this and is exploiting it.
As a builder and construction consultant with forty-three years in the industry, I can say that I have never seen anything like what is taking place in our industry today. Currently, I am a consultant on a case where the builder is owed about $150,000 on a completed home and is still trying to collect his money. Personally, I had a similar problem and have settled for $60,000 less than was due on the balance of $420,000 for a $1,045,000 job. Only to find out later that the customer we worked for on this project has made this a common practice to “negotiate payment” for some of our competing contractors on prior jobs. It’s a new way for them (the consumer) to get “tax free” money legally, but it is destroying the fiber of our industry. It hurts good hard-working small companies trying to make a living.
Here is how it works, and there are several variations that less “honorable” clients may use. We had a contract to complete proposed work for a client, including change orders as the owner added work during the process. We confirmed the funding was in place through their bank for the project. The job proceeded without issue and their monthly payments were on time, the owners were very friendly, and event complimented the work going on. Then about three-quarters of the way through the project the payment became several weeks late. After inquiring, we are told there is a minor glitch with their bank, and we will get paid in about a week. Another three weeks go by and we are now one week from completing the project, not wishing to be late we press on and complete the project on budget and on time. The owners assured us daily that payment was being processed and we should not worry. Then we got a call from a “forensic CPA” who is reviewing our agreement and payments to date on this project.
In the meantime, the project, being a restaurant, was completed so as not to breach our terms of the agreement which could have caused a lawsuit by the owner. Since the work was now completed, we submitted a revised application which represented our final payment on the job, punch list complete, and their architect reviews it and signed off.
The agreement was a “cost-plus” contract with a lump sum fee. A cost-plus contract, is a contract where a contractor is paid for all of its allowed expenses, plus additional payment to allow for a profit. The clients paid all costs and reviewed all contracts. It was an open book accounting; very transparent. Their CPA requested copies of all agreements, change orders, cancelled checks and waivers, which we provided to him. Everything was in order and accountable, however, he took another several weeks to tell us that he has found many discrepancies (but would never disclose them to us). This was an obvious stalling tactic so, at that point, we filed our lien on the project which included notice to the client’s tenants, bank, and landlord. After several more weeks of nothing happening, we hire an attorney to pursue our payment.
This is when their CPA provided us with an offer to accept $160,000 for final payment of the $420,000 owed, which was ridiculous. After further discussion, our attorney prepares to foreclose on the lien. We called the bank to notify them of the foreclosure and are informed that the client told the bank that they will just pay off the loan if we foreclosed, so the bank was not really concerned about the lien. It is at this point we get a letter from the landlord telling us if we pursue foreclosure on his mall he will sue us. It is at this point our attorney gets a revised offer for $260,000 in lieu of the $420,000 from the clients CPA. Furthermore, we are told if we foreclose on the lien, the client could counter sue for anything, and we would eat the legal cost to defend that.
During the construction work we were dealing with two of the owners, who were always very nice and cooperative, but once we entered into legal proceedings we were told that the project was being taken over by their “other” two partners and we would have to deal with them to get paid. Two more weeks pass with no headway on payment when one of the original partners contacts us for a face-to-face meeting to settle the issue.
At our meeting he tells us the job is great, everyone did a great job, however, we were a month late. We started a month late due to their booked events but completed work within the same time frame agreed to. Then we were told that there were accounting problems, again we were never provided anything to explain their claims. But now he offered us $350,000 and told we should take it, or it would be a long legal process for us to collect.
After speaking with our attorney, we seriously considered foreclosure, but it would cost us at least $20,000 or more in legal fees and then we could quite possibly have to defend a lawsuit from the mall owner, and our customer would probably counter-sue and we would need to defend another case. In the end, we would probably win our case, but would we recover the legal fees? Also, they could ask for time to pay off the balance and we cannot finance this work.
We agreed to settle for less money, and they get $60,000 of tax-free money, legally by getting the contract amount reduced through a settlement agreement. We believe this was premeditated and criminal, and it needs to be fixed. Perhaps a law that requires the local municipality to get a “contractor paid notice” before a Certificate of Occupancy is issued. This is why liens in general do not work for contractors and there needs to be serious consideration to changing the state law to prevent further abuse and exploiting of the current law.
A contract is only as good as a person’s word. Know who you are dealing with. Do your own due diligence on them, as they surly will do on you.