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Risks of Pay-if-Paid Terms for Florida Subcontractors

Subcontractors often find themselves navigating risky terms in construction contracts. Among the myriad clauses that can affect their bottom line, “Pay-if-Paid” provisions stand out as particularly risky. These provisions essentially allow the general contractor (GC) to shift the burden of payment uncertainty onto subcontractors, conditioning payment on the GC’s receiving payment from the property owner.

Here’s why this arrangement can spell trouble:

Disproportionate Risk Transfer

Pay-if-Paid clauses transfer the financial risks associated with project payment from the GC to the subcontractor. This can mean that if the GC does not get paid, the subcontractor does not get paid and has no right to claim against the GC for the deficiency. Although the subcontractor may still be able to claim a lien, or pursue the property owner directly, forfeiting the right to claim against the GC is a significant risk. For example, the property owner may have valid defenses to payment, such as GC delays or construction defects. Therefore, forfeiting the right to claim against the GC is a significant concession.

Exposure to Payment Delays Beyond Control

Florida’s construction projects are no stranger to payment delays caused by a variety of factors outside a subcontractor’s control. For example, a plumbing subcontractor may perform it’s job perfectly, but the GC’s framer may get behind schedule, resulting in a dispute between the owner and GC. In this circumstances, the owner may withhold payment from the GC or even financially penalize the GC. Although the plumber performed its job perfectly, a Pay-if-Paid provision may allow the GC to withhold payment until the payment dispute with the owner is resolved. This, of course, is inherently unfair to the plumber who is not at fault.

Exposure to Risk of Property Owner’s Default

In some cases, the GC and all subcontractors may perform perfectly. However, the owner might still encounter financial difficulties outside the contractors’ control. For example, the owner might become insolvent, or declare bankruptcy, during the course of the project. In this scenario, the Pay-if-Paid provision could still force the subcontractor to pursue the bankrupt owner, rather than the GC, even when recovering from the owner would be like “getting blood from a stone.”

Although the subcontractor should still be able to claim a lien, litigation against the insolvent owner, and foreclosure, could take years to resolve. Whereas, if the GC was personally responsible to the subcontractor for payment, the issue might be resolved much sooner.

Recommendations for Pay-if-Paid Provisions

Subcontractors who are faced with a Pay-if-Paid provision in a construction contract should be diligent in their negotiations. First, subcontractors are typically within their rights to request the clause be removed altogether. Second, if the GC will not accommodate this request, subcontractors could request the clause be converted to a Pay-when-Paid provision. The latter condition typically only allows the GC to withhold payment until the GC is paid, or for a reasonable time period, whichever is shorter.

Finally, if the GC will not accommodate either request, the subcontractor should seek to limit the scope of the Pay-if-Paid provision. For example, the subcontractor could limit the clause to state that the GC is only allowed to withhold payment to the extent caused by the subcontractor’s breach of contract, delay, or negligence. If the GC will not consider any of these options, the subcontractor should consider whether the financial risk involved is worth taking on the project.

DISCLAIMER: The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.

Are Verbal Construction Agreements Valid in Florida?

Verbal agreements are typically enforceable in Florida
There are a few exceptions, but construction contracts are usually not included
Therefore, verbal construction contracts are usually enforced by Florida courts

Written Contracts are Typically Not Required

In Florida, construction contracts require three key elements: an offer, acceptance, and consideration (an exchange of something of value). Noticeably, a written contract and signatures are not elements on this list.

Some contracts in Florida must be in writing to be enforceable. For example, contracts for the sale of real estate must be in writing. Likewise, under Section 672.201 of Florida’s Uniform Commercial Code (“UCC”), sales of “goods” for a price of $500 or more usually must be evidenced by some form of writing. While there are some outliers, construction contracts usually do not fit within either of these categories. This is because construction contracts typically do not involve the sale of real property and are primarily service-based contracts.

Here are few examples of when construction contracts might need to be in writing:

The contract involves the construction and sale of real property, such as new home;
The contract involves solely the supply of materials, such as windows that will be installed by a different contractor;
The contract involves the sale and installation of materials, but the materials are more important than the services provided.

Keep in mind, these are exceptions. Most construction contracts do not fit in these categories because Florida courts view contractors as service providers, not merchants.

Proving a Verbal Agreement May Still be Difficult

Although generally enforceable, verbal construction contracts may be difficult to prove. To resolve these disputes, Florida courts may review other documents, listen to the parties’ testimony, and attempt to reconcile any conflicting information.

Evidence such as performance under the terms, documented payments, witnesses, or subsequent written communications can help substantiate the agreement’s existence. However, conflicting information, especially regarding essential terms of the contract, may make it difficult to obtain a ruling in the contractor’s favor.

Parties who are considering filing a lawsuit to enforce a verbal construction agreement should carefully evaluate all factors and available evidence to determine their strengths and weaknesses. One significant roadblock to enforcing a verbal contract may be the existence of a written contract with contradictory terms. Consider the following scenario:

Owner and contractor enter a written contract for a installation of a new roof
The contract states that any changes to the work need to be approved in writing
Owner and contractor subsequently verbally agree to expand the scope of work
Owner refuses to pay for the additional work and violates the verbal agreement

In this scenario, the verbal change order may be unenforceable because the written contract required all changes to be approved in writing. This is a common pitfall for Florida subcontractors.

Best Practices for Contractors

Although verbal construction contracts are typically enforceable, contractors should be wary of entering verbal agreements. Contractors should avoid working, or extending credit, based upon “handshake deals”. These agreements are typically more difficult to prove, and in worst case scenarios, may be unenforceable.

Contractors who are considering accepting a verbal change to an existing contract should demand that the change order be approved in writing. This writing could be as simple as text message or email, although more formal agreements are typically better. Contractors should also review the terms of the written contract to determine if any other procedures are required for the change.

Finally, contractors who are faced with a non-payment situation based on verbal agreement should carefully evaluate their options. When there are conflicting statements or evidence, it may be advantageous to negotiate or make concessions before launching into a conflict or lawsuit. However, if negotiations are not promising, a lawsuit may be required to recover payment.

Requesting a Change Order: 5 Best Practices

Change orders are a common aspect of Florida construction projects, often necessitated by unforeseen circumstances or changes in project plans. For subcontractors seeking additional compensation through a change order, understanding their rights and obligations can mean the difference between success and failure. This article discusses 5 best practices for requesting additional compensation under a change order.

Review the Subcontract to Determine Your Rights and Obligations

Before initiating a change order request, subcontractors should thoroughly examine the subcontract agreement and any addenda for provisions related to change orders. These documents outline the procedures, requirements, and responsibilities for change orders, including the process for submitting and approving them. Look for contract terms discussing the following points:

Any specific conditions or events triggering the right to request a change order.
The procedures for obtaining a valid change order, such as GC approval in writing.
Any limitations on the timing for requesting a change order.

Understanding these contractual ground rules ensures that subcontractors have a solid basis for their change order requests and helps prevent potential compensation disputes.

Identify Any Unexpected or Unanticipated Project Conditions

Change orders often stem from unexpected conditions encountered during the construction project. Many subcontracts make allowances for additional compensation under these conditions. Therefore, subcontractors should diligently assess the project conditions and attempt to determine whether any events have occurred that may support their change order request. For example, the following conditions may support a change order request for additional compensation:

Subsurface obstructions or soil instability.
Delays or repair work caused by the GC, owner, or other subcontractors.
Environmental factors resulting in additional costs (e.g., rain prolonging equipment rental contracts).

By identifying and raising these conditions early on, subcontractors maximize their chances of success in obtaining approved change orders.

Identify Changes in Project Plans or Specifications

Changes in project plans or specifications typically entitle subcontractors to additional compensation under their subcontracts. Therefore, subcontractors seeking a change order would be wise to identify and document any such changes and present them to the GC along with their request for compensation. Examples of changes that could result in additional compensation include:

Expanded scope of work or quantity of services/materials.
Design enhancements affecting the quality of finish work or materials.
Changes necessitated by code compliance or environmental factors.

As with unanticipated conditions, identifying and presenting these causes early on will increase subcontractors’ chances of success when requesting a change order.

Document the Basis for the Change Order

No matter the cause, proper documentation is crucial to substantiate the basis for a change order. Subcontractors should maintain detailed records, including written descriptions, photographs, and other relevant evidence, to demonstrate the necessity for additional compensation. Key documentation may include:

Photos or reports evidencing the existence of an unforeseen condition.
Meeting minutes and correspondence discussing the basis for the change order.
Impact assessments demonstrating delays caused by weather or other subcontractors.
Records of increased costs, such as rental costs, resulting from adverse conditions.

Well-documented change order requests enhance credibility, facilitate effective communication with the GC, and strengthen the subcontractor’s position in negotiations or potential disputes.

Be Prepared to Respond to Rejection

Throughout the change order process, subcontractors should document all communications and negotiations with the GC regarding the proposed changes. It’s essential to maintain a record of discussions, agreements, and any disagreements that arise during the negotiation process.

In the event of a rejected change order, subcontractors should carefully assess their options and potential responses. Depending on the circumstances, actions may include:

Suspending work affected by the proposed changes until resolution is reached.
Seeking mediation or dispute resolution mechanisms outlined in the subcontract.
Involving legal counsel to evaluate the subcontractor’s rights and obligations.

Florida Notice to Owner Deadline Cut Short

Most Florida construction subcontractors and suppliers are aware that they must provide a Notice to Owner and Notice to Contractor (“NTO”) in order to secure their construction lien rights. This document provides interested parties with notice that the potential lienor exists, as required by Florida’s lien law. Failure to provide the NTO on time results in the loss of lien rights.

Whenever a contractor or supplier does not contract directly with the property owner, the NTO must be served before starting work/delivery, or with 45 days of doing so. This deadline provides a fair amount of time for contractors to serve the NTO, especially when there are mailing issues, like failed delivery or re-delivery.

However, there is a common pitfall to be aware of, particularly when a contractor is involved late in a construction project. For example, a landscaping subcontractor may be involved at the tail end of the project, when all work is nearly complete.

Florida Statute 713.06 cuts the 45-day deadline short when two events have occurred:

The direct contractor has provided the owner with a Contractor’s Final Payment Affidavit; and
The owner has made final payment to the direct contractor.

The exact wording of the NTO deadline under Florida law is as follows:

“The notice must be served before commencing, or not later than 45 days after commencing, to furnish his or her labor, services, or materials, but, in any event, before the date of the owner’s disbursement of the final payment after the contractor has furnished the affidavit under subparagraph (3)(d)1.”

This means that, even though there is still time to serve the NTO within 45 days of starting, a subcontractor can still miss the deadline and lose its right to claim a lien. This can have dire consequences for subcontractors and suppliers who are not aware of this intricacy.

In order to avoid this pitfall, subcontractors and suppliers should serve their NTO as early as possible; preferably, before providing any work or materials at the project. To be clear, there is no point of being too early to serve a NTO. All parties should take advantage of this flexibility and provide their NTO as early as possible.

Liens by Unknown Subcontractors

A Florida homeowner recently posted a concerning story in a chat room. The individual is building a structure on his property and found a discounted material supplier, presumably on Craigslist. The supplier offered to provide wood for the project at half price. The owner jumped on the discount, but was wise enough to refuse to pay for the materials in advance of delivery.

The supplier delivered the wood and the owner paid the supplier. However, soon after, the owner was contacted by another company asking for payment for the wood. Apparently, the Craigslist supplier had:

Purchased the wood from the real supplier with a credit card
Directed the delivery to the owner’s project
Collected payment from the owner, and then
Reported his credit card as stolen to avoid paying the real supplier

The owner reports that the real supplier is threatening to record a lien on his property for the unpaid materials. The real supplier’s attorney goes so far as to claim that his client was a legitimate “subcontractor,” that a lien would be proper, and that his client was likely to prevail in court.

Wrong on both fronts!

In this scenario, the real supplier is likely to fail with its lien claim. First, as we have written previously, a supplier’s supplier cannot claim a lien. If the Craigslist scam artists was acting only as a supplier, and not a contractor, the real supplier is not a potential “lienor,” as defined by law. Only lienors can claim a lien in Florida.

Second, and more importantly, it seems that the real supplier failed to serve the owner with a Notice to Owner (NTO). All suppliers and contractors for a project that are not in direct contract with an owner must serve a NTO. This scenario is the very purpose for an NTO, and failure to do so prevents the failing party from claiming a lien.

The deadline for serving an NTO is 45 days after commencing work or delivery of materials. Unless the real supplier was still within its window to do so, and catches its error, it will probably lose its lien.