A Contractor’s, Subcontractor’s and Supplier’s Step-By-Step Guide to Getting Paid-Michigan - Webinar

This blog, presented by SunRay Construction Solutions and Matthew Herstein, an attorney at Deneweth, Vittiglio & Sassak, P.C., provides detailed insights for Michigan construction professionals on how to secure payment throughout various phases of a construction project, including the preliminary stage, project duration, and upon project completion.

Why Should You Have a Written Contract?

In the world of business and residential projects, having a written contract is essential. Here are a few compelling reasons why you should always insist on a formal agreement:

1. Contracts Help Avoid Cnstruction Disputes

A well-drafted contract clearly defines the expectations and obligations of each party involved. This clarity helps prevent misunderstandings and conflicts, ensuring that everyone is on the same page from the start.

2. Contracts Outline What Happens in the Event of a Construction Dispute

Despite everyone's best intentions, disputes can still arise. A written contract provides a roadmap for resolving these issues, detailing the steps to be taken and the remedies available. This can save time, money, and stress if disagreements occur.

3. Contracts Preserve Your Lien Rights in Residential Projects

For residential projects, having a contract is crucial for protecting your legal rights. It ensures that you have a solid foundation to stand on if any issues arise during or after the project.

What Should a Written Contract Include?

To be effective, a written contract should cover several key elements:

1. Identification of Parties

The contract should clearly state who the parties involved are. This includes the names and contact information of both the client and the contractor.

2. Scope of Work

Detailing the scope of work helps prevent scope creep and ensures that both parties understand exactly what work is to be done. This section should be as specific as possible, outlining all tasks and responsibilities.

3. Agreed-Upon Cost

The contract should specify the total cost of the project, including any payment schedules or milestones. This transparency helps avoid financial disputes down the line.

4. Residential Builder’s License Number

For residential projects, it's essential to include the contractor's residential builder’s license number in the contract. Failure to do so can lead to significant issues, such as difficulties in recording a lien or collecting any owed amounts. This step is crucial for ensuring the contractor's credibility and your project's legitimacy.

What is the Scope of Work?

The scope of work defines the specific improvements being made to a property. It details every aspect of the project, ensuring that both the contractor and the client understand what is expected. Here’s why it’s crucial:

Defining the Improvements

The scope of work should clearly state what improvements will be made to the property. This includes every task and responsibility, providing a comprehensive overview of the project.

Managing Changes

If any additional work is required beyond the original scope, your contract should outline a process for handling change orders. This process should specify how much you will be paid for the extra work and how these changes will be approved and documented.

Ensuring Clear Communication

A clear and detailed contract helps maintain open communication with your client. By keeping the lines of communication open and documenting everything along the way, you reduce the likelihood of disputes. This transparency ensures that you get paid the correct amount for the work you do and helps build a trustworthy relationship with the property owner.

What Happens in the Event of a Dispute?

Your contract should clearly outline the procedures for resolving disputes. Here are some key points to consider:

Dispute Resolution Methods

Specify in your contract how disputes will be handled. Common methods include:

• Arbitration: A private and typically faster process than going to court. In Michigan, arbitration is often preferred due to its expediency, but both parties must agree to it.

• Litigation: Taking the dispute to court. This can be a longer and more costly process but may be necessary if arbitration is not agreed upon.

Importance of Including Dispute Resolution in Contracts

Including a dispute resolution clause in your contract is crucial. It provides a clear path forward if disagreements arise, ensuring that both parties understand their options and the process involved.

Considerations for Arbitration

While arbitration can be more efficient, some property owners might be hesitant because they are unfamiliar with the process. Educating clients about the benefits of arbitration and including it in your contract, if possible, can lead to a smoother resolution of disputes.

How to Secure Your Lien Rights in Michigan

Preserving your construction lien rights is crucial, as it can be a contractor's most powerful tool for collecting payment. Here’s how to navigate lien rights in Michigan for different types of projects:

Understanding the Types of Projects

1. Public Projects:

1. These involve government entities or municipalities.

2. You cannot lien public property.

2. Private Projects:

1. These can be either private commercial or private residential projects.

Securing Lien Rights on Residential Jobs

1. Have a Written Contract:

• Ensure your contract includes your Residential Builders License Number. Without this, you risk losing the ability to record a lien or collect owed amounts.

2. Request a Notice of Commencement:

• This document lists everyone working on the project and the legal description of the property, which is essential for recording with the Register of Deeds.

• Note: For residential projects, the Notice of Commencement is not required unless the homeowner does not live on the property.

3. File a Notice of Furnishing:

• Required within 20 days of starting work or supplying materials.

• This Notice of Furnishing informs the property owner and general contractor of your involvement in the project

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4. Use Sworn Statements and Lien Waivers:

• Sworn statements list all contractors working on the project and their payment status.

• Lien waivers indicate the amounts paid and must align with the sworn statements to ensure all parties are compensated correctly.

5. Record a Claim of Lien:

• If unpaid, you can record a Claim of Lien within 90 days of your last day of work.

• Serve the recorded Claim of Lien on the property owner within 15 days of recording.

• The Claim of Lien allows you to initiate Construction Lien Foreclosure on the property, increasing the likelihood of payment.

Handling Payment on Public Jobs

Since you cannot lien public property, protection comes through bonds:

1. Understand Bond Requirements:

• Contracts over $50,000 with a municipality or public owner often require a bond.

• A surety company issues the bond, guaranteeing payment for labor and materials.

2. Preserve Construction Bond Rights:

• Provide a Notice of Furnishing within the first 20 days of supplying labor or materials to ensure your construction bond rights.

• If unpaid, prepare a Notice of Bond Claim and send it to the surety, owner, and contractor, specifying the owed amount.

3. Filing a Construction Bond Claim:

• File the construction bond claim within 90 days of your last day of work.

• Bonds may extend this period, but it's safer to file within 90 days to avoid time bars.

• If unpaid, file a complaint against the surety, which should cover the judgment amount if you prevail.

Dual Claims on Private Projects

On larger private projects, you might have both lien and bond rights:

• Private Projects with Bonds: Large projects may require bonds to ensure contractors pay their subs, preventing liens.

• Claiming Both Lien and Bond: You can pursue both a lien and a bond claim, providing dual avenues for payment recovery.

I Got Paid, Now What?

Once you've received payment, it's essential to handle lien waivers properly to ensure you're protected and compliant with Michigan laws. Here's a guide on what to do:

Exchanging Waivers for Payment

When you receive a payment, you will often be asked to provide a lien waiver. There are different types of lien waivers and lien releases. It’s crucial to understand them:

1. Partial Waivers: Provided in exchange for partial payments.

2. Full Waivers: Provided when you receive full payment.

Types of Lien Waivers

Lien waivers can be either conditional or unconditional, and they can apply to both partial and full waivers:

1. Conditional Waiver: This waiver states that you are waiving your lien rights conditional upon receiving the payment.

2. Unconditional Waiver: This waiver has no conditions attached, meaning you are waiving your lien rights regardless of whether you actually receive the payment.

Best Practices for Lien Waivers

• Conditional Waivers: Ideally, always use a conditional waiver when exchanging a waiver for a check. This protects you if the payment does not clear.

• Unconditional Waivers: Only provide an unconditional waiver once you have received full payment. Never issue an unconditional waiver in advance of payment.

Handling Unconditional Waiver Requests

If someone insists on an unconditional waiver before issuing a payment, consider the following:

• Contemporaneous Exchange: Provide the unconditional waiver at the same time you receive the check.

• Written Record: If forced to provide an unconditional lien waiver in advance, send it with an email or written note stating that the waiver is provided in exchange for the promised payment of a specific amount. This helps create a record of your understanding.

Standard Forms in Michigan

Michigan's Construction Lien Act provides sample forms for sworn statements and waivers. These standardized forms are commonly used and can be a reliable default.

Waiver Forms

While Michigan provides standard forms, you and the other parties can agree to use custom forms with different language if that suits your needs better. The key is mutual agreement between the parties involved.

Pro Tips for Handling Lien Waivers Correctly

• Always prefer conditional waivers for partial or full payments.

• Never provide unconditional waivers before payment.

• Use standard forms from the Michigan Construction Lien Act unless otherwise agreed.

• Document everything to keep a clear record of the exchange and terms.

By following these guidelines, you ensure that your lien rights are appropriately managed, safeguarding your financial interests.

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FAQ’s

Do I Have to Have a Written Contract?

Understanding Lien Rights Under the Michigan Construction Lien Act

Most contractors in Michigan have lien rights under the Michigan Construction Lien Act. While having a written contract is not a strict requirement for securing these rights, it is highly recommended for several reasons.

Importance of a Written Contract

1. Clarity and Protection: A written contract clearly outlines the terms, scope of work, and payment details, protecting both parties and helping to avoid disputes.

2. Residential Construction: For residential projects, having a written contract is particularly important. For instance, if you're building a new house for a client, a written contract helps safeguard your rights and ensures you get paid for your work.

Lien Rights Without a Written Contract

• General Contractors: You can still have lien rights without a written contract. However, a written contract provides stronger legal backing if issues arise.

• Residential Projects: To preserve certain rights, especially in residential construction, a written contract may be necessary. It provides clear documentation in case the homeowner disputes payment.

Licensing Requirements for Lien Rights

• Licensed Contractors: In Michigan, you must be licensed to perform most residential construction work to retain your lien rights. Licensing ensures that you meet state standards and can legally enforce your lien rights.

• Exceptions: There are a few exceptions where unlicensed contractors might still have lien rights, but these are rare and specific. It is generally advisable to obtain the appropriate licensing if you plan to work in residential construction.

While you don't technically need a written contract to have lien rights in Michigan, having one is a good practice, especially for residential construction projects. It provides clarity, protection, and a solid legal foundation in case of disputes. Additionally, being a licensed contractor is crucial for maintaining your lien rights and ensuring compliance with state regulations.

What determines Priority if Multiple Liens on the Same Property are recorded?

Equal Priority of Construction Liens

In Michigan, construction liens generally have the same priority, even if they are recorded at different times. Here’s what you need to know:

1. Equal Treatment: Construction liens are typically treated equally, meaning that if multiple companies file liens against the same property, they share priority.

2. Pro Rata Distribution: In cases where the available funds are insufficient to cover all liens, the amounts owed may be split on a pro rata basis among the lienholders.

Interaction with Other Interests

Other interests, such as mortgages, can affect the priority of construction liens. The key factors include:

1. Start Date of Construction Work: If construction work on the project began before a mortgage was recorded, the construction liens typically take priority over the mortgage.

2. Recording Date of the Mortgage: If the mortgage was recorded before the construction work started, the mortgage usually takes priority over the construction liens.

Can I Include Attorney's Fees and Filing Fees in my Lien?

Under the Michigan Construction Lien Act:

1. Lien Amount: Your lien should only include the actual amount of the construction improvements.

2. Attorney's Fees: While attorney’s fees should not be included in the lien amount, you may recover these fees if you need to foreclose the lien and they are granted under the Construction Lien Act.

How long is my Lien good for?

A construction lien in Michigan is effective for a limited time:

1. Foreclosure Process: You must initiate the foreclosure process within one year from the date the lien was recorded.

2. Timeliness: Failing to start the foreclosure process within this period means the lien will expire and you will lose your right to enforce it.

Focusing on these 3 stages—preliminary considerations, project life, and project completion—can significantly reduce your risk of non-payment issues. Additionally, depending on the stage of the project, this focus can help you get paid quickly and successfully. Secure your payment rights with SunRay's experts. Call 800-403-7660 today and get paid what you deserve.

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