While a general contractor can pursue claims against a public entity and can bring suit to recover damages, subcontractors and suppliers cannot. Unless you have a direct agreement with the public entity, you generally cannot bring claims or file suit against that entity.
However, California law provides you with better remedies to get paid:
• You can serve a stop notice on the public entity.
• You can make a claim on the payment bond required on all public works projects.
• You can file suit against the general contractor and secure penalties if the contractor wrongfully withheld payments.
While California gives you these rights, you can lose them if you do not take the time to follow the simple legal requirements.
Do Your Homework
After you have been awarded the job, you should first ensure you have the basic information you will need to preserve your rights. You need this information early so you can send the necessary 20-day preliminary notices.
California does not require subcontractors who have a direct contractual relationship with the original contractor to serve preliminary notices, but why take a chance? You will need the same information later in the process if you have to serve a stop notice or present a claim on a payment bond.
Obtain the address and contact information for the public entity and its disbursing officer. You will also want the name and contract information used by the public entity to identify the specific project. Finally, you will want to secure the name, address and bond number for the surety company that issued the payment bond.
On most large projects, you should receive all the information you need from the general contractor. If they do not provide it as part of a project information sheet, ask for it and if there are any information gaps, do not be afraid to contact the public entity directly.
Provide the Notice
Unless you have a direct contract with the public entity, you should serve a preliminary notice within 20 days after you begin work or deliver materials or equipment to the job site. That preliminary notice must be served, via certified mail — return receipt requested — on both the public entity and the general contractor. While it is not required, it is good practice to serve notice on the payment bond surety at the same time.
All is not lost if you miss the 20-day deadline. It is better to serve notice late than not at all, as late service only prevents you from enforcing a stop notice for work or materials delivered more than 20 days before the preliminary notice. Finally, while failing to serve a preliminary notice precludes you from making a stop notice claim, it does not stop you from making a claim on the payment bond. If no preliminary notice went out, talk to your attorney first before you assume you have no stop notice rights — you may well be in the class of subcontractors that does not need to serve a preliminary notice.
Stop notices on public projects in California operate in the same way as other jurisdictions. Serving a stop notice on the public entity freezes funds that have not yet been disbursed to the general contractor.
Once a stop notice is served, California law requires public entities to hold the funds. While you will not receive a check the next day, that money is going nowhere.
What is important is that stop notices be properly served, via certified mail, within the statutory deadlines.
You have to be careful about missing the legal deadlines for serving a stop notice. If a notice of completion or notice of cessation has been recorded, you must serve a stop notice within 30 days.
Do not wait until that legal deadline approaches. Even if you beat the deadline, the stop notice may be too late because a stop notice does no good if there is no money left in the contract account to pay the general contractor.
The Payment Bond
In California, a payment bond must be provided for every public project valued at more than $25,000. The payment bond is provided by the general contractor and gives subcontractors and suppliers security for payment.
Even if the public entity runs out of construction funds or the general contractor ceases business operations, you will still have a claim against the surety company that issued the bond. The payment bond is the best guarantee that you will ultimately be paid.
To ensure you have a right to proceed against a payment bond, you should either serve the bond company with your 20-day preliminary notice or service a separate written notice to the surety. California law does not require every subcontractor to do this, but there is no reason not to provide one of these notices. If you failed to serve the 20-day preliminary notice, you still have time to preserve your rights.
You can file a claim on the payment bond as long as you serve the notice to surety within 15 days after a notice of completion is recorded on the project. The notice — described in Civil Code § 3227 — requires the same information as a 20-day preliminary notice and should be served by certified mail on the general contractor and the payment bond surety.
Filing Suit to Enforce a Stop
While California’s statute of limitations for filing suit on a breach of written contract allows you as long as four years to file suit against the general contractor, the deadlines for filing suit to enforce stop notices are much shorter. Because all remedies should be included in one suit, it is the stop notice deadline that usually determines when you need to file suit.
In California, you must file an action to enforce a stop notice on a public project within 90 days of the last date you can serve the stop notice itself. Since you have 30 days after a notice of completion is recorded to serve a stop notice, you have a total of 120 days after the notice of completion is recorded to file suit.
Why You’re Not Getting Paid
There could be a lot of reasons why you are not getting paid. There might be a problem on your end that you do not know about or maybe the general contractor is going under. Maybe the public entity is short on funds or the relationship between the public entity and general contractor has deteriorated because the project has significant problems or delays.
You need to understand why you are not getting paid. If you do not know, find out. If you cannot get straight information from the general contractor, talk to other subcontractors and suppliers. Talk to the public entity.
If there are serious problems with the solvency of the general contractor, there is usually no reason to wait to serve a stop notice. Serve it while there is still money in the public entity’s project account. If there are no serious problems with the project, and you discover there are problems with your own company’s performance that are affecting your ability to get paid, it may not be in your interest to push the dispute into litigation.
While there is no reason to wait until the day before the deadline to file suit, a rush to the courthouse is not always the fastest way to get paid.
Once suit is filed, some contractors turn it over to the attorneys. When that happens, your ultimate payment can be further delayed. Unless you are approaching a critical deadline, take action to resolve the dispute first. Until you have a face-to-face meeting with management personnel on the other side, you probably have not done all you can do to resolve the dispute.
Your Leverage to Get Paid
If you have preserved your stop notice and payment bond rights, you have got leverage to get paid, because the stop notice money is frozen in an account.
While it is not doing you any good, it is not going anywhere and it is not doing anyone else any good. Although you will still have to file suit and obtain a judgment to recover these funds, all parties have a vested interest in releasing these funds.
When it comes to payment bond claims, every dollar spent by the surety bond company to pay claims (or defend against claims) is charged back against the general contractor. Many payment bond sureties require personal guarantees from the principals. Protracted litigation on a payment bond is rarely justified. If the general contractor owes you the money and does not have a legitimate claim against you, there is little motivation for the general contractor to prolong the process.
Like many other jurisdictions, California also has prompt payment statutes that provide for penalties to be assessed against those who wrongfully withhold money from subcontractors and suppliers. A general contractor can withhold up to 150 percent of the money owed if there is a good faith dispute. If there is no such dispute, the party withholding funds can be assessed a 2 percent per month penalty for failing to pay (Public Contract Code §§ 7107 and 10262.5). No general contractor wants to pay that kind of interest if there is no legitimate dispute.
When there are payment problems, the general contractor will often ask you to hold off while they take care of the problems. If you have developed a strong relationship with the general contractor and you have no reason to believe they are insolvent, holding off while the job is still progressing may be the best business decision.
However, you can run into problems when you hold off toward the end of the project because your stop notice is only as good as the amount still in the public entity’s account. Once the job is almost complete, holding off is a bad idea. Once work on the project has stopped, any delay can result in you losing your rights.
Don’t Forget the Big Picture
California law provides you with effective methods to get paid on public projects. If you take action to preserve your rights, you will be in a position of strength to collect any monies owed to you.
While the deadlines for serving stop notices and filing suit are short, there is always time to resolve disputes before calling in the attorneys.
Before slow pay becomes no pay, take the time to make personal contact with management on the other side. Find out what the problem is and push to resolve the dispute.
While you need to get paid for the current project, remember that you may be looking for more work from the same general contactor in the future.
A partner at California-based law firm Carroll Burdick & McDonough, Wallace Smith, J.D., has more than 20 years experience in construction litigation: email@example.com.
Michael Lateef, J.D., is a partner at Carroll Burdick & McDonough, specializing in tax issues, intellectual property rights and business development: firstname.lastname@example.org.